Exotic pairs are crosses between two currencies with the base currency representing a developed economy and the quote currency representing an emerging economy. Some examples include EUR/TRY (Euro vs Turkish Lira), USD/ZAR (US Dollar vs South African rand), USD/MXN (US Dollar vs Mexican Peso), USD/CZK (US Dollar vs Czech koruna), EUR/HKD (Euro vs Hong Kong Dollar).
Exotic currencies represent emerging economies and are not usually used for major economic transactions. Stronger or more stable currencies such as the U.S. dollar or the euro are usually used for the purposes of those transactions. Since exotic currencies are not extensively traded, they showcase lower trading volumes which translate to low liquidity and higher spreads.
Trading exotics – emerging economy currencies – requires experience as the currency prices often experience high volatility which can result in either great gains or great losses. Knowledge and meticulous studying of the set of factors that can move those currencies as well as testing out trading strategies in a demo account can help you better recognize the direction in which the prices of the assets could move.
In short: Forex pairs can be divided into three groups: majors, minors or crosses, and exotics. You can read more about major pairs in How to Trade the Major Forex Pairs – Part 1 and about minors or cross pairs in What is a Cross-Currency Pair?
How to Trade the Exotics Pairs
When trading exotic pairs, it is important to keep an eye on the release of national economic data such as CPI data, GDP, interest rates etc. Geopolitical events can also affect the performance of developing countries’ currencies. Export trade agreements, natural disasters, and the country’s economic development prospects include some of the factors that can affect the price of the assets.
Below, we are presenting some exotic currency pairs and outline some of the main factors that can move their prices.
EURTRY – For this pair, the euro (EUR) is traded against the Turkish lira (TRY). The Turkish lira is one of the most traded currencies in the foreign exchange market. The currency pair started trading in 2008 and has been quite liquid compared to many other exotic currency pairs. However, volatility has decreased due to monetary policy aimed at maintaining price stability in the Eurozone market. The best time to trade the EURTRY is during the European session.
USDZAR – The US dollar (USD) against the South African rand (ZAR) is one of the most popular exotic currency pairs in the foreign exchange market, and its performance is highly dependent on the correlation of the two economies. South Africa is one of Africa’s major economic powers and is heavily dependent on foreign trade. Therefore, the South African rand represents an emerging market that can be strongly affected by developments in global commodity markets. The dollar is one of the most stable currencies and remains the world’s major reserve currency. The USDZAR is a preferred asset in carry trading strategies due to its interest rate differentials.
USDMXN – This pair represents the US dollar (USD) traded against the Mexican peso (MXN). Mexico has close geographical, political, and commercial ties with the United States, which makes the Mexican currency very sensitive to US policy changes. The preferred time for investors to trade USDMXN is during the US trading session.
USDCZK – This pair represents the price of the U.S. dollar (USD) traded against the price of the Czech koruna (CZK). The dynamics of this currency pair depend on developments in the U.S. and Czech economy. When trading the pair, keep an eye on the main U.S. economic factors and world oil prices. Industry, the automotive sector, electricity, electronics, and brewing are at the forefront of the Czech Republic’s economy and most of the goods produced in the Czech Republic are exported. The Czech Republic’s main trading partners are Austria, Germany, and Russia.
EURHKD – For this exotic pair, the euro (EUR) serves as the base currency and the Hong Kong dollar as the quoted currency (HKD). Hong Kong imports a lot of its products and raw materials and its most developed sectors are utilities, trade, and international tourism. The pair is heavily influenced by the U.S. dollar. To trade this pair, you need to take into account the European Union and Hong Kong’s economic data, as well as the main U.S. economy indicators such as the GDP, inflation data, the discount rate, the unemployment rate, the NFP, etc.
Exotic pairs are characterized by low liquidity, high spreads, and high volatility. This makes trading these instruments both highly rewarding and highly risky which calls for strong risk management to be in place. Trade an extensive list of exotic pairs with Traders Trust and benefit from zero fees on deposits and withdrawals and lightning-fast execution.