What Are Exotic Currency Pairs?

Currency pairs are the national currencies of two countries, with the value of one currency quoted against the other on the foreign exchange (forex) marketplace.

There are three types of currency pairs: major, minor, and exotic. Majors are commonly traded pairs in the forex market (USD/CAD, EUR/USD), minors are less traded pairs (GBP/CAD, CHF/JPY), and exotics are advanced currencies traded against less developed ones (USD/TRY, EUR/HUF, or GBP/MXN).

Advantages of Trading Exotic Pairs

• Higher potential profit: While novice traders are better off avoiding exotic pairs, the more seasoned investors can spot many trends, whether they are day trading or swing trading.
• Interest rates: Since inflation is typically higher in developing markets, interest rates will be higher in these countries. This is crucial because higher rates generally mean greater interest accumulates on the currency invested.

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Disadvantages of Trading Exotic Currency Pairs

• Higher spreads: The higher spreads in exotic pairs will mean that more capital will be required to trade.
• Liquidity issues: Because trading exotic currency pairs is not as popular as trading the major pairs, there is less liquidity floating around, making it more challenging to enter and exit a trade at your target price.
• Devaluation: Exotic pairs are vulnerable to significant changes in government policies without any warning, whether a central bank slashes interest rates or the country is in political upheaval. Depreciation risks are prevalent.