A key consideration in EM currency trading is liquidity. Most major industrialized currencies are relatively liquid, but emerging market currencies are often thinly traded, especially away from peak trading hours. In fact, illiquidity is often seen as the cause of volatility in pairs such as the dollar/rand and dollar/peso. (Or is it the other way around — does volatility in the pair create illiquidity?)
The reduced number of market participants active in these currencies affects the “smoothness” with which they trade. With market makers offering liquidity during only the most active periods, prices and spreads tend to be somewhat hit or miss — even for upper-echelon bank and institutional traders during off-peak hours.
This can be problematic for traders used to the high (and relatively consistent) liquidity of G7 currency pairs. Nonetheless, for experienced traders, this is simply another consideration to be weighed in light of the reward that may be available in the emerging currencies.
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