Exotic currency pairs
The forex market today is one of the most liquid places for trading. It is no secret that high liquidity of the forex market is due to the popularity of some currency pairs. The most popular ones are the US dollar (USD), euro (EUR), Swiss franc (CHF), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD) and the New Zealand dollar (NZD). Then the cross rates follow i.e. the currency pairs that do not include the US dollar.
In addition, there is another category of currency pairs. They are called exotic. Exotics are traded much less frequently and are used only by a limited number of traders. As for the structure of exotic currency pairs, its first currency is main or base, while the second one is a quoted currency. It indicates the exchange rate in relation to the base currency. Exotic currency pairs include currencies of emerging economies quoted against the major rivals on Forex, including the US dollar, euro, Japanese yen, British pound, Swiss franc and the Canadian dollar.
The second component of an exotic currency pair is a quoted currency of a developing country. It may be an Asian country, Middle East or African nation. Thus, there are 30 exotic currency pairs on Forex, including the Singapore dollar, Brazilian real, Swedish krona, the Indonesian rupiah and others. For example, exotic currency pairs are the following: USD/RUB, USD/MXN, EUR/DDK and so on. Some exotic currencies have no trading pairs, so the trade between them is carried out through the US dollar. It is worth noting that exotic currency pairs are used very rarely as they have high spreads and are illiquid and difficult to forecast. Traders choose currencies of countries with underdeveloped economies much more seldom than the majors.
Although, experienced analysts say that exotics are financial instruments with non-standard characteristics, but with a huge potential. They also note that an average daily volatility for exotics is significantly higher than for majors and that is the main difference between them.
Furthermore, Asia, Middle East and Africa have quite different monetary policies from those of European and American banks, so these nation’s currencies could both rise and fall sharply.
The very phrase "exotic currency pairs" means specific character of these forex instruments. Novice traders are cautious about trading illiquid currencies due to lack of experience.
Meanwhile, professionals are aware of existing risks, but not many of them are willing to experiment. The main disadvantages of exotics are low liquidity and difficult predictability.
But at the same time, if handled intelligently, they can be used to boost profits as well as other forex tools.
Experts predict that the growth of transactions on Forex involving exotic currencies is based on the development of information opportunities for traders. Today, traders have a huge room for manoeuvre: it is possible to get not only historical data using trading terminals, but also real-time market quotes. The internet allows you to analyze a political situation in any part of the planet.
In addition, each user has access to economic indicators of a particular country. Therefore, we can say for sure that all these internal reserves contribute to successful trading with the help of exotic currency pairs.