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Knowing More About Exotic Currencies in Forex Trading

Knowing More About Exotic Currencies in Forex Trading
May 29, 2021 Tom Clark

The Forex Market, also known as the Foreign Currency Exchange, is another financial market that particularly buys and sells currency pairs of different countries all over the world. It has become very popular and actively traded with more than $5 trillion of transactions being made every day. It is important to note that 80% of the entire transactions happening in the forex market revolve around the seven most traded major currencies in the market today.

Three Major Currencies

But aside from these major currency pairs, it is important to know that there are still other currencies to consider and they are known as exotic currencies. Three main categories divide the currency pairs in the market. These are the major currencies, cross-currency, and exotic currencies.

Major Currency Pairs

These currency pairs mostly contain USD on one side while the other side mostly belongs to the most traded currencies in the market.

Cross-Currency Pairs

These pairs mostly contain some major currencies but are not paired with USD, instead, they are paired with Euro or the British pound, the Australian Dollar, and the Japanese Yen.

Exotic Currency Pairs

These pairs are made up of one of the major currency pairs while the other currency is of emerging or small countries like Turkey, Singapore, Sweden, and South Africa.

Majors vs. Exotics – What are the most appropriate trading strategies?

If you happen to venture into Forex trading exotic currencies, you will find that it is a totally different game compared to trading currencies. There are a couple of factors affecting the exotics market. This is the reason for a little sway in the currency market. Because of this, traders who are opting to trade exotic currencies need to have the right knowledge so they can succeed in making trades. Also, these exotic currencies are not that liquid compared to major currencies because there is less activity, which spells a longer-term investment plan.

Exotic Currency Pairs

  • Euro and Turkish Lira – EUR/TRY
  • US Dollar and Turkish Lira – USD/TRY
  • US Dollar and Singapore Dollar – USD/SGD
  • US Dollar and Danish Krone – USD/DKK
  • US Dollar and Swedish Krona – USD/SEK
  • US Dollar and South African Rand – USD/ZAR
  • US Dollar and Norwegian Krone – USD/NOK
  • US Dollar and Mexican Peso – USD/MXN
  • US Dollar and Thailand Baht – USD/THB
  • US Dollar and Hong Kong Dollar – USD/HKD

Political Factors Affects Exotic Currencies

One of the differences between major currency pairs and exotic currency pairs is that they are significantly affected by political factors. Major political turmoil has sure effects on major currencies but these effects are usually minimal and mostly short-term. But Forex trading exotic currency pairs need to be well aware of the economic, social, and political factors as it will cause dramatic effects on the currency value as well as strong and very fast fluctuations.

Currency Pairs Affected By Political Instability and Commodities Markets

There is political instability happening nowadays with the USD pairing with the Mexican peso (MXN) and South African rand (ZAR), resulting in major fluctuations. There are also currencies that are linked to the country’s commodities such as the Australian Dollar, New Zealand Dollar, and the Canadian Dollar.