Currency pairs are not all the same. There are popular pairs like EUR/USD and GBP/USD that are known as majors. These pairs combine the US dollar and other currencies from developed countries like Japan, Switzerland, and the Eurozone.
There are also minor currency pairs that are formed by combining those of developed countries. They include the EUR/JPY and EUR/GBP.
Exotic currency pairs, on the other hand, combine those of developed countries and emerging markets. In this article, we will look at some of the best exotic currency pairs to day trade.
What are exotic currency pairs?
Exotic currency pairs are formed by combining currencies from developed countries with emerging markets (EM). An EM country is demonstrating strong growth and is projected to become a developed country in the near term.
Some of the main EM countries are China, Russia, Brazil, South Africa, and India. These countries are popularly known as BRICS. Others that are worth noting are countries like Singapore, Malaysia, Hungary, Indonesia, Mexico, and Turkey.
Below are some of the top exotic currency pairs.
- USD/RUB – US dollar and Russian ruble.
- USD/ZAR – US dollar and South African rand.
- USD/BRL – US dollar and Brazilian real
- EUR/MXN – euro and Mexican peso.
- TRY/JPY – Turkish lira and Japanese yen.
Unlike currency majors, most brokers don’t provide these exotics in their platforms because of their low liquidity and low demand from retail traders. Also, fundamentally, there are low trade flows between several countries, meaning that impacts on the currencies are often minimal.
Still, at times, exotics may be a bit volatile because some emerging market countries have erratic processes.
For example, in Turkey, the president has the mandate to appoint the head of the country’s central bank. There is also no process of hiring a central bank governor other than the president’s appointment. Here are the top exotic currencies to day trade.
The USD/TRY is an active exotic currency pair. A long-term chart shows that the pair has been in an unstoppable bull run. The pair has risen by more than 480% in the past 13 years.
The weakness of the Turkish lira is mostly credited to President Recep Erdogan, who had advocated for low-interest rates even when they were not conducive. In his thinking, he believes that low interest rates, even at a time of high inflation, leads to a faster growth rate.
As a result, he has a long history of replacing Central Bank governors who appear to be independent in their approaches to monetary policy. For example, in 2020, he replaced an arguably ineffective governor with Naci Agbal, who was widely respected. At the time, the Turkish lira was trading at the lowest level against the US dollar.
After coming to the office, he made a series of rate hikes, which helped to stabilize the lira. This angered Erdogan, who replaced him in March 2021, pushing the lira to a record low.
USD/TRY has been in a strong rally
Therefore, the USD/TRY is an ideal exotic currency pair to day trade because of this volatility. It is offered by most brokers and is also relatively liquid.
The US dollar and the South African rand are popular exotic currencies in the market. The same is true with other similar pairs like the GBP/ZAR and EUR/ZAR.
Unlike Turkey, South Africa is known to have a solid and independent central bank. However, the country has an often mixed political situation. The country saw weak investor confidence a few years ago during the Zuma presidency. Cautious optimism returned during the Ramaphosa presidency as he vowed to fight corruption.
South Africa is also a unique country because its economy is changing. For years, the mining sector was the leading employer. In the past few years, the industry has lost thousands of jobs and became a small part of the economy. As a result, it has pivoted to the manufacturing and the services sector.
South Africa is also known for its unstable parastatals like South African Airlines and Eskom, the power operator. As a result, even before the pandemic started, the country saw its credit rating cut by agencies like Moody’s, Fitch, and S&P Global.
The USD/ZAR is an ideal exotic currency pair because of its high volatility and substantial liquidity. Many brokers also offer it.
The US dollar and the Russian ruble is also another popular exotic currency pair. It is a relatively liquid and volatile pair for several reasons.
First, as the third-biggest oil producer, the country is affected by the price action of oil prices. Higher oil prices are usually beneficial for the Russian ruble. Second, the country is also a leading exporter of commodities like wheat, natural gas, and palladium.
Further, the USD/RUB is often affected by geopolitical issues since the US and Russia take differing sides on key issues. As such, events like sanctions and wars tend to impact the USD/RUB pair. Other key catalysts for the pair are the Federal Reserve and Russian Central Bank interest rate decisions.
The US and Mexico have a lot in common. They are neighbors and are important members of the USMCA trade agreement. They are also some of the biggest trade partners in the world, carrying out trade worth more than $660 billion every year.
Furthermore, they are also some of the biggest oil producers in the world. As such, the USD/MXN pair is actively traded because of all these relationships. Like the others mentioned in this list, most brokers offer it, as it’s highly liquid and, at times, volatile.
There are many exotic currencies. While these four are the most popular pairs, there are others that we have not looked at, like the EUR/MXN, GBP/TRY, EUR/BRL, and EUR/ZAR, among others.
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