Trading in the Know: An introduction to emerging market currencies.

Most foreign exchange traders will mostly trade the liquid major currencies (also known as vanilla currencies) – USD, GBP and JPY and sometimes minor currencies such as CAD, CHF and AUD. There are clear benefits to trading pairs that involve these currencies. The main reason is liquidity, because there are numerous participants within these markets, it’s easy for a trader to enter and exit from positions, there are less liquid currencies from emerging and developing countries, these currencies are call exotic currencies. Because of the illiquidity of theses currencies sometimes it is difficult to exit and enter the market, exotic currencies are also prone to whipsawing due to unstable political and economical structures of developing countries. But if traded correctly investors can make significant returns from the large moves and long trends which is a common trait with some exotic currencies.

Trading exotic currencies is not for novices, the illiquidity of these currencies means that the spreads are very large compared to those of the major currencies pairs, also taking into account exotic currencies can have large whipsaw moves a trader will need to have a large amount of money to trade exotic currencies effectively.

Within the exotic currency category are currencies from emerging countries, economically these countries are growing rapidly towards a more advanced economy. Typically these countries will have highly sought after natural resources and the price of their commodities usually has a direct affect on their economy and exchange rates. The four main emerging are Brazil, Russia, India and China; they have been coined as the ‘BRIC’ nations (sometimes South Africa is included in this list). Out of these nations China has experienced the greatest level of growth; this is mainly due to China manufacturing about ⅗ of all goods produced in the world. The same British economist Jim O’Neill also coined another term ‘MINT’ nations these include Mexico, Indonesia, Nigeria and Turkey.

#Mexico’s currency is the Mexican Peso (MXN) which is the 12^th most traded currency in the world, most of Mexico’s growth has stemmed from its manufacturing that it mainly exports to the US. Recently the Mexican Peso has risen against the US Dollar to a five month high on the back of a worst than expected first quarter GDP report. The forecasted GDP was 2.1% but the actual result can in at 1.8%, analysts believe that the lower than expect GDP results will force the Mexican central bank (Banco de Mèxico) not to increase interest rates and to keep them the same for the near future, this has fuelled the demand for Mexican government bonds.

#Indonesia’s currency is the Indonesian Rupiah (INR), Indonesia has grown due to exports from is agricultural industries and raw materials such as natural gas, Indonesia also have a thriving tourist industry. Within the emerging market currencies the INR has been one of the world’s best performers for 2014 as Indonesia’s current account continues to move out of the red and into the black. Indonesia is currently gearing up for their presidential elections on July the 9^th, and depending on the result this may have an effect on the Rupiah.

#Nigeria’s currency is the Nigerian Naira (NGN), they have the largest economy and population in Africa. Nigeria has huge oil and gas supplies and is the 8 largest supplier of oil in the world and a member of OPEC, they also have flourishing industries within telecoms, music, movies and air travel amongst others. Recently Nigeria has hosted the World Economic forum but this has been marred by the current kidnapping of over 200 school girls by a Terrorist organisation, and bombings in public places. This has made some investors cautious about investing in Nigeria, and questions are being raised regarding the government’s ability to maintain order and security for its residents. Since the kidnapping of the school girls the Naira has fell about 2% versus the USD, which has prompted the Central Bank of Nigeria to intervene by purchasing Naira in order to stop the currency from falling further.

#Turkey’s currency is the Turkish Lira (TRY), Turkey’s growth has is due to the exports of the car manufacturing, electronics and oil industries in the country. Turkey’s central bank reduced its interest rates from 10% to 9.5% on 22^nd of May, a decision that didn't go down particularly well with the Turkish Prime Minister who believes the rate cut was too small. Turkey is in the midst of an economic recovery and the Prime Minster feels that the high interest rate levels is preventing investors investing in Turkey, the Lira fell against the dollar by 0.3% after the comments were made and analysts believe the central bank will be forced into lowering rates by a greater amount in the near future.