When we talk about forex trading, then there are many various types of traders. Or most participant in the trading market prefers to limit their whole experience of trading to major currencies. Some traders at the same time also trade as well in emerging market currencies. It is said that exotic trading currencies have some best or distinct advantages. In most exotic currencies cases, the central bank’s interest rates are higher than major currencies. So for carrying traders, the participants of the trading market can utilize them. In this situation, the traders can invest the amount in emerging market currency that is higher-yielding by borrow money from a major currency that low-yielding.
In addition, one point also should describe here that is more helpful at any time; they are few emerging market currencies that are off less cost than major currencies. So its offer to participants of the trading market to open their positions at bargain prices with exotic currency or get benefit potentially from capital appreciation.
As we can see, many best online trading platforms are present in the market. One of them is trading exotic currencies with some advantages and some risks, especially for forex traders. So we should keep in mind that due to different inflation rate or sometimes instability of the economy, engaged few emerging market currencies in the downward trend for the long term against the euro, US dollar, or other major currencies. So buying these exotic currencies or, for an extended period keeping their position open can be indeed very risky.
Exotic currency pairs are less predictable or more volatile as compare to forex majors. So these types of trading pairs with a high amount of purchase can put the individual of trading capital under high risks or lead to some losses.
higher interest rates with currencies
in forex trading, a popular strategy is a use of carrying trades. This strategy uses traders by finding low yields currency, or maybe close to zero, or borrowing money from then to buy the currency of high yielding. Or the traders that keep their position open as long as they receive interest payments daily from the brokerage firm. It is also called rollover or swap. So many currencies with high interest rates present in different countries. Most countries start trading when their interest rates became high. There is also the present history of these countries that invest in trading.
To attracts traders towards emerging market currencies, not only factor is higher interest rates. The fact is that most emerging market currencies, according to indicators, are unvalued. This measure represents the exchange rate at which will equalize the services and goods average prices between the two countries.
According to a magazine of British financials, The Economist, against the US dollar, the Mexican peso still was undervalued by about 33%. Or this degree of undervaluation is greater than the Turkish lira, South African rand or Russian ruble. Later, RUB undervalued 43% against the USD.
So it means that the participant of the trading market can buy at bargain prices some emerging market currencies. But it is not guaranteed that the trading market participants will always end up trading trades. But odds it can improve for the long term traders.
Despite all exotic currencies trading benefits, these also have as well downsides. The most important currency disadvantage is that most of these exotic currencies are engaged in the downward trend of the long term against the major currencies. Let’s take an example.
In 2018, in January, the USD/TRY pairs trading was close to the 3.70 level. In subsequent months, steady gains get the US dollar against the Turkish lira. So we can see that the fact od upward trend of the long term remained here intact.
In 2020, in October, the worth of one US dollar about 7,89 of the Turkish lira. So it means that the trading currency pair of USD/TRY in three years or less has risen 113% approximately. Or it also means that against major currencies, the Turkish lira is engaged in a persistent depreciation. Or the interest rate that about 10.25% can seem to appeal to few participants of the market, but the sharp depreciation of the Turkish lira wipe out all gains for the traders, or they make with carrying traders.
But it not means that every single emerging market currency always will lose ground against the major currencies or US dollar. Or it is also true that few currencies are those that are stabilized and against US dollar the also made some gains. So it is helpful for all those traders that want to open their positions in the exotic currency pairs they should do proper due rigour.
Lack of information or higher Volatility
We know that several emerging market currencies are not always engaged against major currencies in a downward trend. But it not can change this fact that exotic currencies in the majority also not tend to be pretty or volatile. Let’s take an overview for more visualization.
At the start of 2018, the trading pair USD/ZAR was close to about 12.00 level. In the subsequent months, steady gains get the US dollar by a trend that accelerated after the pandemic outbreak of Covid-19. As a result, in 2020 in March, the trading pair US/ZAR climbed the way up to mark 19.00. That represents an increase of more than 58% compared to January 2018. Or in the sharp correction dropping pair with more than13% in the 16.50 mark.
Here we can see that more volatile are emerging market currencies than Forex majors. But it not helps that the number of economic announcements can be smaller than major currencies for those countries. For instance, when we talk about the US economy, we have consumer confidence reports, payroll numbers, industrial production, and other useful announcements.
However, it is not necessarily it will happen in the case of most emerging market economies. So in this way, it isn’t easy to make an exact or accurate prediction for the movements of these exotic currency pairs.
Hope the above reason or facts that explain that exotic currency pairs are risky for most Forex traders. It will help you understand more about trading terms.