Currencies are classified by Forex into three categories, those being the major, the minor and the exotic currencies. Exotic currencies are those that are characterized by being illiquid and are thinly traded. Also in regards to the consistent market activity they do not have much popularity. The currencies will generally trade with high mark-up fees.
Based on the geopolitical and economic development the trading patterns are constantly changing and that includes exotic currencies. The following list shows which currency pairs are counted as exotic.
These currency pairs are counted as exotic because they exhibit characteristics of exotic currencies which includes wider bid/ask spreads and thin trading. Also the participants in the market show a limited trading interest in these currencies.
An exotic currency does not mean that the currency is then weak or is undervalued. An exotic currency though does however; show that the currency is not very popular in its trading behavior.
For instance the Kuwaiti Dinar (KWD) is a high valued currency, but it is considered to be an exotic currency because of the limited trading. The same can be said about the Saudi Arabian Riyal (SAR).
What are the Risks for Forex Exotic Currency Trading?
The risks of trading Forex exotic currency is the liquidity as well as other contributing factors that we will look at now.
- The Purchasing Power Parity and the interest rate differentials will play a role in impacting the demand and supply trends of forex rates. The macroeconomic factors are hard to forecast and to keep track of. The risk then increases as it is hard to keep track of the challenges and there is also a lack of awareness.
- Forex exotic currencies are harder to trade because of low liquidity. The majority of transactions happen at banks, which already have a set of fixed rates for activities like remittance and such.
- When you analyze the historical data of these exotic currencies they will show you that there is profit as well as opportunities in regards to the seeable price variations over differing time periods. The profit potential of these can be eaten away because of the fess that Forex dealers use, which have a high mark up.
- In the country where the currency originates from there could be high fluctuations because of political uncertainty. This will then make it difficult for even the most knowledgeable traders to trade with exotic currencies.
During the Ukrainian conflict in Russia’s, there were large swings that range from 33.5 to 67 per USD. This happened from July 2014 to December 2014.
The Iraqi dinar investment scheme experienced the same and there are investors, which have been waiting for a long time to see a return on their investment.
The Rewards of Forex Exotic Currency Trading
Even though there are some obvious risks with exotic currencies, they do also have a highly unpredictable nature and price moves that are of high value over short and long term. This can then create huge profit potential.
- If you were on the other side of the Russian/USD exchange rate then you would have made a tremendous profit over the couple of months’ time frame. It would have been about 80% or more.
- The USD to the Indian rupee increased from 2008 to 2013. There was a 77% profit as it increased from 39 to 69.
You don’t just need to buy the exotic currency, as there are other investment choices where you will be able to benefit from exotic currency. The other products that you are able to invest in with exotic currencies include currency options, currency futures and barrier options on currencies. These are offered as OTC products and you are able get them in certain markets.
These products are more complicated which then increase the complexity of exotic currency trading.
The Right Trader for Forex Exotic Currencies
When you take into consideration the factors that are involved with trading exotic currencies, you will see that they are not for beginners, short term traders or traders that are operating with a limited trading capital.
The ones that will benefit from trading exotic currencies are experienced market makers and dealers. They will be able to exploit on their wider spreads which are balanced off with their counterparts.
Long term investors may see that forex exotic currencies are good investment options if they are looking to add some diversification to their investments at a global level.
An investor that has a consistent follow up on a particular country or currency and has a long term investment potential could cash in on the exotic currency with the approach of setting it and forgetting about it.
The trading of exotic currencies is not for everyone. Short term profits are marked by high mark-up fees and wider bid ask spreads. Long terms investments will require more knowledge of developments and patience. The exotic currencies should only be taken into consideration if you have the experience and risk taking potential.
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.