Exotic currency pairs and liquidity

The South African rand (ZAR) is considered an exotic currency in forex trading. It’s the currency of an emerging market.

Exotics are characterised by low levels of liquidity, wide spreads compared to the majors (US dollar, euro, British pound, Japanese yes, Canadian dollar and Australian dollar), and high volatility (which makes it a high risk but frequently higher-reward investment).

As such a large and important player on the African continent and in the world, the ZAR often trades in larger volumes than most other exotics. Trades are mostly of the USDZAR pair.

Technical Analysis Trading With USDZAR

All exotic currency pairs, including the South African rand, are considered more “technically obedient” than their major counterparts. That means, for example, that should the ZAR breakout of key support or resistance lines, it can be expected to exhibit price action that aligns with what traders might expect of the breakout. 

What To Look For When Considering a Rand (ZAR) Trade

News & Economic Calendar Releases

It’s important to know what upcoming events are on the economic calendar that could affect the USDZAR pair. Focus on both the high-impact news and data releases related to the US and South African economies. Calendar events such as GDP, unemployment data, measures of inflation, and retail and consumer confidence are among the key influencing releases to watch out for. 

Make sure you’re aware of these ahead of time in order to give yourself time to react. You should be aware of the expected numbers of these releases and whether the final releases beat or fall below the estimates.

Several sources you can check regularly for news related to the pair are Investing.com, the Forex Factory economic calendar and FXStreet.

Monetary Policy

Monetary policies made by central banks, such as interest rate decisions, are perhaps the biggest influencing factor on any currency or currency pair. As a general rule, an increase in interest rates should strengthen the home currency, while a decrease in interest rates is expected to weaken the currency.

Analysts often try to predict interest rate decisions by looking at inflation data in particular. Because the current price of any currency already factors in these expectations, it is actually inflation data and the future expectations it creates that impacts most on the currency rather than the interest rate decision itself. The ZAR is no different here. Keep a close watch on expected monetary policy of both the US Federal Reserve and The South African Reserve Bank.

In Summary

  • The South African Rand is one of the most traded “exotic” currency pairs in the world.
  • Like other exotics, it is characterised by periods of, especially high volatility. This makes pairs like the USDZAR high risk, high-reward pairs.
  • Exotics like the rand are considered to be more “technically obedient” than majors. This makes them attractive to technical analysis traders.
  • Traders should be aware of pending calendar releases related to the South African and US economies.
  • Traders should be aware of monetary policy and expected shifts in monetary policy from the respective central banks of the two countries.

For more information on the currencies available at TIOmarkets, visit www.tiomarkets.com

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