As the date for Brexit draws closer, we become ever more aware of the ways that it could affect different aspects of the UK’s economy and financial markets.
One area worth considering is how the forex market could be affected, specifically the exotic pairs element.
What Are Exotic Currency Pairs?
The forex market works based on trading a pair of currencies, and the most commonly traded pairs involve major currencies, like GBP/USD and EUR/USD. Investors choose a pair where they believe that one of the currencies will rise in value against the other.
However, many other national currencies can be traded in this way. For instance, you could form a pair with the British Pound against the South African Rand or the Mexican Peso. These pairs offer more volatility and less liquidity than the more commonly seen combinations.
An exotic pair could be worthwhile considering if you have some sort of advantage over other investors. Perhaps a Brit who lives in South Africa and regularly does business between the two countries would feel that they could more accurately predict the future of GBP/ZAR than other people?
For others, it is simply a chance to explore an interesting market where profits could be made. The wider trading range on many of these pairs allows varied strategies to be tried out, such as trend trading and breakout trading.
What Could Be the Brexit Effect?
At the moment, it still isn’t clear how big an effect Brexit will have on the Pound or our relationship with the US and other trading partners. One thing we know for certain is that the currency markets tend to fluctuate more when there is uncertainty in the air.
When the Brexit vote went through, the UK’s currency plunged as investors worried about what this would mean for the economy in the long-term. If the country’s negotiators manage to remove the uncertainty by getting good trade deals with the EU and other partners, GBP could enjoy a strong rally at the start of 2021.
On the other hand, what if no deal is reached with the EU and the country’s companies see their existing foreign markets disappear before their eyes? This is a situation that would adversely affect the national economy and level of imports/exports, possibly causing an effect on interest rates and making the Pound lose value.
The GBP/EUR pair could be the most affected by Brexit, due to the current close links between them being broken, but some exotic pairs could also be greatly affected by this change. For instance, if we go back to the Rand, the exchange rate could vary according to the new trade deal that the UK has struck with South Africa.
The EU is South Africa’s biggest trading partner, and the UK’s trade with the African nation was worth R142 billion in 2018. It is yet to be seen if the SACUM-UK economic partnership agreement reached in 2019 is better or worse for Britain than their previous agreement as part of the EU. This is just one factor, but it could be one of the most important for this currency pair.
In the Warrington area, the Inland Border facility at Appleton Thorn will be a welcome boost to the local economy, but it is the overall effect on the economy across the country in 2021 that is important. It could take time for the effects of Brexit to be seen in this respect.
How Can You Take Advantage of GBP Fluctuations?
If, as seems likely, there is a higher than normal degree of fluctuation in the exotic pairs market after Brexit, investors will be keen to take advantage of this. To do this, the first step is to look into all of the relevant factors that determine GBP’s possible future value against the other currency you are interested in.
Using leverage allows traders to benefit more from any price swing in their favour. The best UK forex brokers site confirms that brokers in the UK provide different amounts of leverage, with this figure often between 1:3 to 1:5. Factors such as leverage policy are also explained for those who wanted to explore currency pairs, and other details important to remember. They also mention that small spreads keep the risk of losing money lower and that demo accounts can be used to try out new markets or strategies.
To make a smart decision, you would need to carry out extensive research on the latest news articles covering trade agreements, interest rates, employment figures, and other relevant factors. Another alternative is to simply look for expert opinion online and follow their recommendations to the letter.
