Investing > Exotic Currency Pairs 101

Exotic Currency Pairs 101

Exotic currency pairs present unique challenges for traders. Learn more to see if these volatile, illiquid pairs might be right for you.

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Updated February 11, 2022

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Wouldn’t you love an exotic vacation? 

The word “exotic” conjures in us images of palm trees leaning precariously over a beautifully curved shoreline. White sand beaches, sunsets, drinking out of coconuts with little umbrellas – it’s a whole vibe. 

It’s not necessarily something we associate with the forex market (unless you have your own very special relationship with forex, in which case, more power to you!). What’s more, in forex, exotic currencies don’t really refer to those currencies most likely to pay for beachside resorts. ☀️

In forex trading, exotic currency pairs are those pairs that are less traded in the market. While the idea of being on your own little desert island in the market might excite you, these pairs work a bit differently from the majors – so you’ll need different strategies.

Whether you’re interested in expanding your horizons as the Dollar falls pending Fed policy meetings, or you’re new to forex as a whole and finding the right strategy for you amid a surge in forex trading, you’ll want to have a thorough understanding of any pair before you invest. In this guide, we’ll take you through the basics of trading exotic currency pairs and highlight a few options and how they work so you can get started trading. 

What you’ll learn
  • What Are Exotic Currency Pairs?
  • EC Pairs and Their Characteristics
  • How to Trade Exotic Currency Pairs
  • Advantages and Risks
  • Conclusion
  • Get Started with a Forex Broker

What Are Exotic Currency Pairs? 👨‍🏫

If you’ve already started forex at all, you’ve already noticed that some currency pairs get more attention than others. China’s vast economy makes it so that its rising forex reserves is big news, while the need for larger reserves in the Central Bank of Sri Lanka might be harder to dig up information on. 

You may have heard of major currency pairs, which are some of the most-traded currency pairs on the market. Exotic currency pairs are basically the opposite. 

Exotic currencies refer to any currency that is infrequently traded in the forex market, and not often used in global transactions. These currencies can be extremely volatile, as they are often attached to developing or emerging countries whose economies can swing more quickly.

Keep in mind, there are several significant aspects which influence the price of currencies:

Exotic currency pairs are more volatile, and as such, respond strongly to economic events.

Exotic currencies are often not very liquid, since there is a small amount of trading volume going on. This can create trading difficulties, as bid/ask spreads can sometimes be much greater because of the lower volume. Not all brokers will trade all currencies, as we get into later on. 

Governments can also create exchange rate controls, which can make some currencies difficult or impossible to trade. Price changes in these markets are often caused by political upheaval, rather than economies and interest rates as is more common with the major currencies.

Examples of popular exotic currencies include:

  • South African Rand
  • Iraqi Dinar
  • Thai Baht
  • Uruguay Peso 
  • Mexican Peso
  • Turkish Lira 
  • Norwegian Krone
  • Hungarian Forint
  • Czech Koruna 

These currencies are often traded against major pairs, such as the US Dollar, Japanese Yen, British pound, or Euro. Each presents a unique landscape, so now we’ll take you through some of the more popular currency pairs and what you need to know before you start trading.

Popular Exotic Currency Pairs and Their Characteristics 🌎

In order to understand a currency pair, you’ll need to do research on both nations’ economies. Some national economies depend upon certain commodities that a nation imports or exports large quantities of; these are called commodity currencies. Other economies are more diversified, and thus more stable. 

GBP/ZAR (British pound/South African Rand) 💷

The British pound (GBP) is considered a major currency pair, while the South African Rand (ZAR) is more exotic. GBP’s relative value will primarily rely on the interest rates set by the Bank of England, and it will become more volatile if their interest rates decrease. 

The ZAR is considered a commodity currency. South Africa’s largest export is gold, so their economy will correlate strongly to the price of gold. For example, during the financial crisis of 2008, gold prices plummeted and the Rand decreased in value about 35% in comparison to the British pound.

correlation with the price of gold
The correlation with the price of gold (orange line) and the value of the ZAR against the GBP. Image by TradingView.

The Rand’s value also correlates to iron ore, platinum, and agriculture. If you want to understand what might happen to this currency’s value, you’ll want to keep an eye on how these sectors are impacted by political choices and even weather. There will likely be more volatility in times of political unrest in South Africa. 

USD/THB (U.S. Dollar/Thailand Baht) 💵

The U.S. Dollar is the most traded currency in the world because the United States has a strong currency that is often a staple of the global economy. The dollar is frequently impacted by new policies or announcements from the Fed, stimulus packages, and major news. 

The Thailand baht is an exotic currency, and it is one of a small number of exotic currencies with minimal response to downturns in China’s economy. This has made the pair appealing to many traders looking for a safe haven when trade negotiations get tricky between the U.S. and China.

USDTHB pair
The THB responds to the Chinese economy, which is why the USD/THB pair is often used to bet on the changes in the China/U.S. relationship. Image by TradingView.

While Thailand still qualifies as an exotic currency, they actually have the eighth largest economy in Asia, and some of the lowest rates of unemployment worldwide. They have fairly diversified exports, including electronics and machinery. 

The Thai Baht is often buoyed up by low-yield bonds and large surpluses and reserves. The currency’s value is impacted by policies from the Bank of Thailand.

EUR/TRY (Euro/Turkish Lira) 💶

The Euro is the second most traded currency in the world. This is a currency that is used by 19 countries in the European Union. As such, it is impacted by political news in those countries and primary trade partners and policy from the European Central Bank (ECB). For example, in October EUR fell after an unpopular policy meeting from the ECB.

The Turkish Lira used to have one of the lowest values of any currency, but has gained traction after a series of economic reforms in 2005. It is still a volatile currency, and has dealt with a debt crisis in recent years that caused its value to decrease again for a time. 

eur-try pair
The TRY has been losing value against the dollar for years, but an occasional geopolitical event can still make the par even more volatile. Image by TradingView.

The volatility of this pair may appeal to some traders who know how to work that volatility to their advantage. However, the pair has become more stable since new monetary policies have worked toward stability since the 2018 debt crisis in Turkey. In 2021, Turkey raised their required reserves by 200 points.

AUD/MXN (Australian Dollar/Mexican Peso) 💵

The Australian Dollar is a commodity currency, and can be somewhat volatile thanks to that. As the biggest exporter of coal and iron ore, as well as a major producer of petroleum and gold, Australia’s economy can fluctuate based on the price of these commodities. 

Australia is the second-largest producer of gold in the world, so their Dollar is likely to rise when the price of gold rises. Australia’s economy is also linked to China, as China is its largest customer, especially when it comes to iron. 

AUDMXN pair
Among other things, AUD’s strengthening over the MXN is often preceded by a jump in the price of iron. Image by TradingView.

Mexico’s economy is also highly dependent on its exports. Trading policies and reports such as tariffs, policy changes to the North American Free Trade Agreement (NAFTA), and any changes in supply chains can impact the Mexican Peso. 

JPY/NOK (Japanese Yen/Norwegian Krone) 💴 

The Japanese Yen is a very popular currency pair for many traders. It has a very low cost to borrow, making it a common choice for carry trading. It’s considered a safe haven for many who trade it alongside the U.S. dollar. 

Norway’s economy is highly linked to its oil exports, and rising oil prices will boost the Krone as well. Their primary trade partners are the US, the UK, Germany, France, and others. This means these economies will impact the Krone as well. 

USD/SEK (U.S. Dollar/Swedish Krona) 💸

We’ve already established that the U.S. dollar is one of the top global currencies. The Swedish Krona is a much stronger currency, and is impacted by a number of factors. The Krona is very tied to other Nordic economies, such as those of Denmark and Norway. 

Swedish monetary policy also deeply impacts the Krona’s exchange rate. Their central bank is called Sveriges Riksbank, and they have employed a floating exchange rate since 1992. While they have committed to change over to the Euro eventually through the Treaty of Maastricht, there seems to be little popular support for this move. 

USD SEK
When the price of oil went down, the SEK gained value over the USD, despite Sweden’s focus on oil exports. Image by TradingView.

The Krona is viewed as a safe haven currency, meaning it will typically hold steady or increase in value when market conditions get tricky. This is thanks to its high rates of education among its workforce. In March, experts recommended the Krona thanks to its lack of exposure to oil. However, in recent years (2015-2019), we have seen weakness in the Krona that has caused some to call for a switch to the Euro. 

How to Trade Exotic Currency Pairs 💱

So, now you understand what an exotic currency pair is, their unique positions in the global marketplace, and the types of factors that can affect even the most popular of this less-popular crowd. If you’re ready to go out and buy a whole bunch of lira, that’s great – but wait just one moment to make sure you’re ready to get started. 

There are a few common-sense tips that will help you in any trading strategy, but especially when you’re trading currency pairs with extra risk and extra considerations. Let’s go through this checklist before you invest your hard-earned cash in a currency you just heard of this morning. 

Manage Your Risk ⚖️

Exotic currency pairs bring more risk thanks to their volatility, their illiquidity, and the turbulent political situations in many of their home countries. This means that you need to be extra diligent about your risk management strategies. 

Most forex brokers will offer demo accounts, where you can try out a few trades without putting actual money at stake. Sure, if you would have won big with your Monopoly money, that can be a drag – but if you lose big, you’ll be glad you didn’t put that hard-earned cash on the line. Sign up for a demo account and see which pairs make the most sense to you and result in the kind of returns you want to see. 

You can also add stop losses to keep yourself from losing too much money on your trades. If you’re trading a commodity currency, you may be able to hedge your forex trades by making counter-investments in opposite currencies through particularly turbulent times.

Stop-loss orders are also a way to lock in profits.

Even though leverage in forex can bring you bigger gains, it can also bring you bigger losses. Make sure you understand how to use leverage before you dive into big leverage ratios that could tank your entire portfolio.

Pick (And Research!) Your Favorite Pair 🕵️‍♂️

Forex is a commitment. You’ll want to keep an eye on national economies, the economies those economies depend on, and prices of any commodities those economies correlate to (we know, we said “economies” too many times – but there’s a lot of research involved!). 

To start, we advise picking your favorite pair, and getting super knowledgeable about how both those countries work. This will help you make better decisions on managing your investments going forward. 

Find the Right Broker 🔎

Not all brokers allow you to trade every currency. Make sure that your top-tier fantasy currency pair is actually tradeable on your platform. You want to make sure you have one of the top forex brokers, and then check which pairs they’ll allow. Some brokers, like IG and Saxo Bank, are known for having a very wide selection of currency pairs available.

Advantages and Risks of Trading Exotic Currency Pairs ⚠️

So, should you trade exotic currency pairs? The answer, of course, depends on what kind of trading you’re looking to do.

Exotic currency pairs are not liquid, which can make it difficult to execute a trade exactly when you want it, and also means higher spreads and more cost to you—this means that day trading these pairs isn’t the safest idea. 

However, they are also more volatile, which can mean bigger profits if you know how to play the system. This can make a slower trading style like swing trading more viable.

Due to its fast-paced nature, day trading is based on technical analysis, whereas major economic events are more important for swing traders.

Exotic currency pairs have lower correlations with other financial markets such as stocks and bonds, which means they are less impacted by global market shifts. However, they are quite prone to losing value when political shifts happen in their specific countries. 

Pros

  • Higher potential profits from volatility 
  • Less impacted by market forces such as stocks and bonds

Cons

  • Higher potential risks from volatility 
  • Less liquid 
  • Higher spreads
  • Value can plunge due to political turmoil

Conclusion 🚀

By the end of this guide, we hope you’re more knowledgeable about what exotic currency pairs are and the unique challenges they pose. While they may not exactly represent that dream vacation on your very own island, they might help you rake in enough dough to get there if this kind of strategy is up your alley.

As with any forex trading, make sure you’re doing your research on whatever pair you choose, and understanding how world events and economies can impact your investments over the long term. If you’re careful and thoughtful in your trades, your chances of success can only rise! 

Exotic Currency Pairs: FAQs

  • What are Major, Minor, and Exotic Currency Pairs?

    Major currency pairs refer to the top-traded currency pairs worldwide (EUR/USD, USD/GBP, USD/JPY, etc). Minor currency pairs refer to those pairs that do not include USD (the most highly-traded currency), but do include one of the three other top pairs (JPY, GBP, EUR). Exotic currency pairs refer to less traded currencies such as ZAD, THB, or CZK.

  • What is the Cheapest Currency?

    While values shift, some of the cheapest currencies typically include the Vietnamese Dong, Ugandan Shilling, Indonesian Rupiah, and Uzbekistani Som. 

  • What is the Safest Currency Pair to Trade?

    While all currency pairs include some risk, pairs attached to nations with more stable economies will also be more stable. This includes EUR/USD, GBP/USD, USD/JPY, and USD/CAD.

  • Which Currency Pair is Easiest to Trade?

    The highest-traded currency pair, which is also the most stable and therefore predictable, is EUR/USD. This makes it an excellent choice for beginners. 

Get Started with a Forex Broker

Fees
Average spread EUR/USD standard

0.9

0.69

All-in cost EUR/USD - active

0.363

0.86

Minimum initial deposit

$250

$200.00

General
Total currency pairs

93

62

Demo account?
Social / copy trading?
Rating
Fees
Average spread EUR/USD standard

0.69

0.75

All-in cost EUR/USD - active

0.86

N/A

Minimum initial deposit

$200.00

$50

General
Total currency pairs

62

47

Demo account?
Social / copy trading?
Rating
Fees

Average spread EUR/USD standard

0.9

0.69

0.75

All-in cost EUR/USD - active

0.363

0.86

N/A

Minimum initial deposit

$250

$200.00

$50

General

Total currency pairs

93

62

47

Demo account?

Social / copy trading?

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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