Currency pairs can be divided into three groups: highly liquid (euro, British pound, yen, Swiss franc), moderately liquid (Canadian and Australian dollars) and exotic currencies (rand, yuan, etc.). Highly liquid pairs are not recommended for beginners due to slippage, high volatility. The market with large liquidity is managed by institutional investors, who easily beat out traders with a small capital. Exotic currencies will be interesting to conservative traders who do not seek short-term income. And how to invest in them, read on.
Invest in exotic currencies
Exotic currencies are currencies that do not have a decisive influence on the global economic investment system. Their low liquidity determines the type of strategy – we are not talking about short-term speculation. Investments in these currencies are long-term (from a month or more).
Characteristics of exotic currencies:
- big spread. Due to relatively low demand, the sellers and buyers market gap between the purchase and sale prices is high;
- low liquidity;
- the influence of fundamental factors on a specific region. If the dollar and the euro can be influenced by the economic policies of China or Japan, then exotic currencies are influenced by regional policies: balance of payments, budget deficit, military conflicts, etc .;
- exotic currencies are tightly controlled by the Central Bank;
- difficulties with the use of fundamental analysis. The news situation in such regions, if covered, then with a delay. Finding detailed financial reports of securities or companies in the region is not easy.
Strengths of exotic currencies:
- Exotic currencies are more subject to fundamental analysis than technical. It is enough to follow the economic indicators of the country and keep track of publications in order to predict the course;
- because of the insignificant volatility on them, it is perfect to hone strategies and gain trading experience. They can be called a venture project. “Exotic” may be a year in the flat with a narrow corridor, but “shoot” for a few months. Example: rand growth in 6 months by 25%;
- “exotic” has no sharp jumps and failures from force majeure or any significant reports.
- Recently, analytical resources have increasingly focused on statistics from developing countries.
Some analysts also consider the ruble to be exotic. Crucial influence on its rate is provided by oil and the share of oil revenues in the budget.
Summary. Exotic currencies are a tool for conservative but professional traders. Exotic strategies can be complementary to daily trading to diversify risks. The rate of exotic currencies is growing during the world shocks, which can be seen in the example of the events of January and July 2016.