In the realm of foreign exchange (forex or FX), currencies are categorized into groups based on their trading volume, the size of the economy, market liquidity, and the stability of the originating country. The most traded and well-known currencies, such as the US dollar (USD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), and the Swiss Franc (CHF), are referred to as “major currencies.”
An “exotic currency” is a term used to describe currencies that are traded less frequently, are less liquid, come from smaller economies or emerging markets, and are not widely held as reserve currencies. The exoticness comes from the fact that these currencies are often associated with geographic regions that are less accessible in the global trading sphere and thus hold a kind of “exotic” allure to traders and investors, much like an exotic travel destination that is less frequented by tourists.
Exotic Currency Pairs:
When an exotic currency is paired with a major currency for trading on the foreign exchange market, it forms an “exotic currency pair.” These pairs usually have less trading volume, less liquidity, higher spreads, and more volatility than major currency pairs (like EUR/USD) or even minor currency pairs (such as EUR/AUD).
Why They Are Called Exotic:
They are termed “exotic” not because there’s anything particularly strange or unusual about the currencies themselves, but because they are encountered less frequently in the global FX markets. Their “exotic” nature is also due to their being less researched, leading to a lack of understanding or predictability in their behavior when compared to the currencies of large, stable economies.
Examples of Exotic Currencies:
- The South African Rand (ZAR)
- The Turkish Lira (TRY)
- The Brazilian Real (BRL)
- The Indian Rupee (INR)
- The Russian Ruble (RUB)
Exotic Currency Pair Examples:
- USD/TRY (US Dollar/Turkish Lira)
- EUR/ZAR (Euro/South African Rand)
- GBP/INR (British Pound/Indian Rupee)
- JPY/NOK (Japanese Yen/Norwegian Krone)
Why Trade Exotic Currencies?
While exotic currency pairs can be riskier due to their lower liquidity and higher volatility, they can also offer greater profit opportunities for savvy investors who understand the factors that influence these currencies. This could include local economic indicators, political stability, commodity prices (as many exotic currencies come from commodity-exporting nations), and interest rate differentials.
However, the costs associated with trading exotics can be higher due to wider spreads, and the risks can be greater. As such, trading in exotic currencies is typically more suited to experienced investors who have a deeper understanding of the specific country’s economic fundamentals and can afford to take on the additional risk.
This page was last updated on November 3, 2023.