Forex Daily Recap – Fiber Looking for Recovery as ECB Plans for Monetary Easing

EUR/USD

After maintaining a steady downtrend for the last six sessions in a row, the Fiber bulls attempted for an upward drift today. However, a major counter trendline confined the pair’s upside, disallowing above 1.1187 level. Even if the pair had made a triumphant march, breaching this counter trendline, then the overhead SMAs would have got activated. The ECB Monetary Policy decision remained at the center stage throughout the day. Today, though the policymakers decided to keep the interest rates unchanged, the future guidance revealed more Quantitative Easing. The ECB minutes read that the bank would prepare for more policy easing in the guidance plan. Along with that, the bank would also encourage the purchase of more bonds.

EURUSD 240 Min 25 July 2019
EURUSD 240 Min 25 July 2019

The Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases,” the ECB said in a statement.

Later, after the bank’s policy meeting, ECB President Mario Draghi mentioned some dovish stances on the economic outlook. Draghi highlighted that the rebound estimated to come in the second part of the year came out unreal. And, the President added that the incoming signs only showcased more weakness.

AUD/USD

The Aussie pair had managed to stay within a more-than-a-month old uptrend channel until today. Notably, the tumbling rally triggered on July 18 possessed significant power that allowed the bears, to make happen this breakdown. Also, the Relative Strength Index (RSI) had drenched beneath 27 lowest levels, luring the sellers.

AUDUSD 240 Min 25 July 2019
AUDUSD 240 Min 25 July 2019

The RBA had come up with reductions in the interest rates twice since June, setting the interest rates to an all-time low of 1%. The policymakers mentioned that such a stance was taken, aiming to improve the overall economic growth and inflation rates. Today, RBA Governor Philip Lowe said, “Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates.”

USD Index

After taking a bounce off the 1-month old ascending slanting support line on July 18, the Greenback had undertaken the risk to test a major counter trendline. On July 22, the USD Index had managed to cross above the aforementioned barrier. Even today, the uptrend remained intact. However, the USD Index had to take some extra efforts while handling the robust 97.77 resistance.

US Dollar Index 240 Min 25 July 2019
US Dollar Index 240 Min 25 July 2019

At 16:56 GMT, the Greenback had almost breached the 97.77 level, moving above, marking daily high near 97.86 level. The US economic docket remained positive on Thursday with upbeat Jobless and Durable Goods data. The most crucial June Non-Defense Capital Goods Orders that excludes Aircraft reported 1.7% higher than the market expectation of around 0.2%.

USD/HKD

Three days back, the USD/HKD pair had taken the initiative to make a breakthrough out of a major counter trendline. Following such a splendid breakout, the bulls appeared to remain quite entertained in the last few sessions.

USDHKD 240 Min 25 July 2019
USDHKD 240 Min 25 July 2019

However, the sturdy 7.8158 resistance handle restricted the pair’s upside today. This resistance handle had even played the role of a support line multiple times, earlier this month. Also, needless to mention, the firm support line stalled near 7.8016 level would have taken care of any substantial downfall in the pair.  

The article was written by Bharat Gohri, Chief Market Analyst at easyMarkets

Exotic vs Major & Minor Currencies

While the currency pairs we hear about most often are the major and minor pairs, there are actually far more exotic currency pairs to trade. In this introduction, we will define the types of currency pairs and cover some of the basics you’ll need to know before you begin trading the ‘exotics’.

Major and Minor Currency Pairs

Firstly, we should define major and minor currency pairs. The following are regarded as major currencies:

  • US Dollar (USD)
  • Euro (EUR)
  • Japanese Yen (JPY)
  • British Pound (GBP)
  • Swiss Franc (CHF)
  • Canadian Dollar (CAD)
  • Australian Dollar (AUD)
  • New Zealand Dollar (NZD)

Major currency pairs refer to any pair containing one of these currencies and the US Dollar, so while there are eight major currencies, there are only seven major currency

An important issue in the currency market is liquidity – i.e. the amount of any currency being bought or sold at any time. The most liquid currency pairs tend to have natural supply and demand from exporters and importers in addition to the supply and demand generated by speculators and investors. Since all the countries listed above have substantial trading relationships with the US, constant liquidity is provided by exporters and importers.

Minor currency pairs include any two of the major currencies apart from the USD. Some of these pairs, including GBP/EUR and AUD/JPY represent pairs of countries with active

trade relationships, providing significant liquidity. Others, like CHF/JPY and EUR/JPY, have less active natural supply and demand.

Currency Liquidity

Before we move on to exotic currencies it’s important to understand that there are two major forces driving the exchange rate between two currencies; natural supply and demand, and the relationship between those two currencies and other currencies – most notably the USD. If you exchange GBP for EUR, importers, and exporters in both the UK and Europe will be buying and selling both currencies, providing an active market. On the other hand, if you exchange GBP for NZD, there will be fewer importers, and exporters active in the market – the quotes will more likely be a combination of the GBPUSD rate and the USDNZD rate. With currencies that are even less liquid, exchanging one currency for another will inevitably involve exchanging the first currency for USD and then exchanging USD for the second currency.

Most forex brokers offer clients forex trading either in the direct currency market or via CFDs (contracts for difference). Either way, the spreads they offer depend on the liquidity of the underlying currency market. Even though you may see a pair quoted as just two currencies, for the trades to take place in the underlying market, at some point an extra leg may have to be executed by a market maker.

What are exotic currencies?

Exotic currencies are any currencies not mentioned already. Some like the Hong Kong Dollar (HKD) and Norwegian Krone (NOK) are actually very liquid, some like the Mexican Peso (MXN) and Thai Baht (THB) are fairly liquid, and others like the Malawian Kwacha (MWK) and Laos Kip (LAK) have very little liquidity.

Exotic pairs are those that include one major currency and one exotic currency. While there are over 150 countries that could be classified as developing nations, trading in exotic currencies is focussed on 18 currencies. Admiral Markets UK Ltd, a prominent forex and CFD broker, for instance, lists 19 exotic FX currency pairs including 10 exotic currencies. There are plenty of other exotic currencies, but in most cases, brokers will only offer those that their clients demand.

The following are the most widely traded exotic currencies:

  • Norwegian Krone
  • Polish Zloty
  • Czech Koruna
  • Hungarian Forint
  • Russian Ruble
  • Turkish Lira
  • Chinese Yuan Renminbi
  • Singaporean Dollar
  • Hong Kong Dollar
  • South Korean Won
  • Thai Baht
  • Malay Ringgit
  • Indonesian Rupiah
  • Indian Rupee
  • Mexican Peso
  • Brazilian Real
  • South African Rand

With any broker, the spreads being offered for a currency pair will reflect the underlying liquidity for that pair. Admiral Markets, for instance, offers spreads as low as 0.1 pip for the EURUSD pair (the most liquid pair in the world) to 5 pips for CADCHF and 10 pips for the USDCNH. For even less liquid currencies, the spreads can be much wider, in some cases reaching 800 pips.

Which Currencies Should You Trade Exotic Currencies Against?

An exotic currency will usually have better liquidity if it is traded against the currency of a major trading partner. The Turkish Lira is therefore usually traded against the Euro, the HKD against the USD or Chinese Renminbi and Mexican Peso against the US Dollar. You would struggle to find a broker offering a Malawian Kwacha/Swiss Franc pair, but even if you did, the spreads would be very wide. In most cases, exotic currencies from countries in or close to Europe are traded against the Euro, and others are traded against the USD.

Pros and Cons of trading Exotic Currencies

The currencies of developing nations are often volatile and prone to trend strongly. Some countries with large current account deficits have structurally weak currencies that have weekend consistently for decades, while others have steadily strengthened over time.

This means there are certainly opportunities for forex traders to profit. The downside is that trading costs can be high and are some currencies are prone to large, unexpected moves when government policies are changed without warning.

For the most part, traders need to have a longer-term view when trading exotic currencies than they would with major currencies. The less liquid a currency is, the longer the time horizon should be. Some, like the Norwegian Krone and Singapore Dollar, are very liquid and can be treated like major currencies. However, others, like the South African Rand and Turkish Lira are not suitable for intraday trading and are only suitable for medium-term trading under unique circumstances. In most cases, exotic currencies require time horizons of weeks to months, unless a very unique opportunity presents itself.

Secondly, traders must familiarise themselves with the typical patterns for a particular currency before trading it. Each currency has its own unique personality and there are usually good and bad times of the day and week to trade them.

Conclusion

While trading exotic currencies are less straightforward than trading major and minor pairs, they do offer very profitable opportunities. Every few years there is usually an emerging market currency crisis which results in some currencies moving as much as 20 to 30%.

These situations offer forex traders opportunities they will seldom see in major pairs. It is therefore worth learning more about these currencies and adding another tool to your trading arsenal.

Risk disclosure: Forex and CFD trading carries a high level of risk that is not suitable for all investors. Presented information is not an offer, recommendation or solicitation to buy or sell. Before making any investment decisions, you should seek advice from an independent financial advisor to ensure you understand the risks involved. Read more at admiralmarkets.com.