The best exotic currency pairs in Q4 2023

As the market moves into the fourth quarter of 2023, many forex traders are on the lookout for the right deals to end the year on a high. One tempting option is the world of exotic currency pairs, where traders look to take advantage of higher volatility and wider spreads compared to major currency trading.

This article will explore the five exotic currency pairs that could be worth investigating in Q4, as well as what to consider when investing in this area.

Measured risk

In forex trading, major currency pairs always include the US dollar and one other major currency. Exotic pairs, on the other hand, involve trading at least one emerging market currency. In some cases, exotic pairs will include two currencies that are rarely traded together. Although exotic pairs have lower liquidity than major currency pairs, the volatility can often present significant opportunities for successful trading.

The risks are often higher, however, which is why thorough significant trading experience, research, and smart risk management are essential. For example, many forex traders will look to hedge their risk through exchange-traded funds (ETFs) that provide long and short exposures to many currencies. Some investors will also opt to buy a long-term stake in certain currencies while speculating with short-term stakes in others. In any case, it is always a good idea to maintain significant liquidity.

Major versus emerging

There are several interesting prospects regarding major and emerging pairs. The Hungarian forint (HUF) versus the euro (EUR), for example, is a current favorite among many traders. Perhaps unsurprisingly given the political and economic tensions between Hungary and the EU, this pairing has seen tremendous volatility in recent years. While the forint has enjoyed a resurgence in the last few months, many analysts expect the long-term trend of weakening against the euro to continue.

Another politically and economically volatile union comes with the US dollar (USD) and Russian ruble (RUB). With the advent of the Russo-Ukrainian war, the last two years have seen tremendous peaks and troughs, and traders can expect these fluctuations to continue in the short-to-medium term. Indeed, browsing the forex charts, it is clear that the ups and downs of these combinations are often significantly more pronounced than with major pairings.

Truly exotic

In terms of exotic pairings where there is no major currency involved, the Russian ruble versus the Chinese yuan (CNH) is also an intriguing match-up, particularly given the ambiguous relationship the two countries enjoy. Some investors are also attracted by less obvious examples, such as the Brazilian real (BRL) and the Turkish lira (TRY), where profit potential can often be truly striking, with the real moving from 1.62 in October 2021 to a current high of 5.57.

Finally, traders may also want to explore the relationship between the US dollar and the Swedish krona (SED), which is currently vying for the title of most volatile currency pair of the year.

Whichever ones traders like the look of, however, it is vital they remember that volatility cuts both ways. There is no way to truly minimize the likelihood of losses, which is why risk management and careful research remain the best strategy.