Investing in ‘exotic’ currencies might pay off

The world of foreign exchange is divided into three parts: Majors, minors and exotics. Most traders concentrate on the majors and ignore the rest. But there is ‘gold’ to be found in exotics, although the risk is high.

The major are first of all  EUR/USD, USD/JPY, GBP/USD USD/CHF. These see the most trade and have the most liquid market. Then there are the ‘commodity currencies’ AUD/USD, USD/CAD and NZD/USD. These are also heavily traded.

Minor pairs (also sometimes called cross currency pairs) don’t feature the US dollar. They are EUR/GBP, EUR/AUD, GBP/JPY, CHF/JPY, NZD/JPY, and GBP/CAD. These are also heavily traded, but not necessarily as liquid as the majors.

Exotic pairs may offer better yields

Then, all the rest, are considered ‘exotic’ pairs.

These come from countries with economies that are less stable, and therefore their currencies are more volatile. But the advantage is that they offer larger profit if you bet on them the right way – remember you can go long, meaning that you bet the currency pair will gain in value, or short, meaning you bet against it.

Make no mistake; this is risky business. But if you do your research, you have the chance of earning more.

And there is another, market-related reason to trade exotics at this time.

Investors are on hold as the US Senate continues its debate on the $1.9 trillion stimulus. If it passes, it could lead to further weakness in emerging market currencies, as investors move their funds back into dollars, betting on an improving US economy.

Shorting the Turkish lira

• USD/TRY

Trading platform Capital.com recommends going ‘short’ against the Turkish lira.

“The Turkish lira has been under pressure lately. The currency has dropped by more than 8 per cent since February 16 in part because of the weakness of EM currencies, but also for fundamental issues.

Second, there is uncertainty about the next action by the Turkish Central Bank. It has left its interest rates unchanged for two consecutive months.

As such, analysts will be watching for the outcome of the bank’s meeting that is scheduled for March 19.

This is important because the latest data revealed that the country’s inflation is rising. The headline consumer inflation rose by 15.61 per cent in February from the previous month’s 14.97 per cent. Similarly, the producer price index rose from 26.16 per cent to 27.06 per cent in February. As oil prices keep rising, this trend could continue. A hawkish CBRT will probably offer some support for the lira.

There is also a possibility that the Biden administration will impose new sanctions on Turkey for buying military weapons from Russia.”

Gambling on the Russian rouble

• EUR/RUB

Russia’s rouble is on a long-term roller-coaster ride. What this means to the investor is that you try to guess when it will go up, and go long, then you go short as it goes down.

It’s not easy, because all of these movements are closely linked to, but not perfectly correlated with the price of oil. Russia’s economy is almost entirely supported by oil exports. When oil is strong, most of the time, the rouble is too.

For example, the rouble shot up this week to an over-two-week high against the dollar, as oil prices hit a their highest in over a year on OPEC+ supply cuts and hopes of recovering demand.

Events within Russia, like monthly taxes, increase demand for the rouble and can push it higher against the euro.

But announcements of threatened sanctions, which occur more and more often currently, have the opposite effect.

An investor should research rouble fundamentals very carefully before investing. But good research may lead to solid rewards, and if you get the hang of rouble investing, profit can result.

 Chinese yuan sees increased investor interest

• EUR/CNYDIN

As the Chinese economy becomes a more dominant player in international trade and the yuan continues to gain more acceptance, an increasing number of investors are placing funds in the Chinese currency.

From 2015 to 2020, the devaluation of the yuan by the Chinese government has accelerated from approximately 6.20 yuan-to-the U.S. dollar (USD) in 2015 to more than 7.10 in 2020. This means that it is not being kept at a low value by Chinese authorities, as it was in the past.

The Chinese yuan does not entirely move freely, as it is still heavily influenced by actions by Chinese regulators. But the yuan is approaching that status quickly and becoming more readily accessible to investors. Investors have several yuan investment options, including purchasing yuan directly and holding it in cash, investing in funds that hold the Chinese yuan, and buying yuan futures contracts, according to investment.com.

“As the Chinese economy continues to expand, rapidly moving China from its status as the premier emerging market economy toward being the world’s number one economy overall, the yuan is in greater commercial use worldwide. China’s commitment to attaining a more prominent position in the global financial economy is reflected in the establishment of the Asian Infrastructure Investment Bank (AIIB) and the Contingent Reserve Arrangement, a sort of mini-IMF for the Asia-Pacific region.

“As the Chinese economy continues to expand, the yuan is gaining greater acceptance worldwide.

Investors can take positions in the yuan by opening a savings or deposit account with US dollars, but the account is denominated in yuan.

Investors can also buy exchange traded funds (ETFs) designed to mirror the performance of the Chinese currency.”

This is again an investment that requires careful research. It is also one that is more for the long-term than the quick turnaround.