Avoid the equities wipe out by riding the fast-moving forex wave
By spread betting currencies you can avoid the boom and bust bedevilling other markets, says Katie Hope
Global currency trading has burst into popularity in recent times as investors try to profit from exchange rate fluctuations. The rapid moves of currency exchange rates are what attracts investors to the market. It’s fast-moving and exciting area. The white water rafting of spread betting, if you will.
Even the demure Japanese housewife has got in on the act, blithely gambling the Japanese yen in exchange for much higher interest rates from a multitude of currencies ranging from the Turkish lira to the Omani riyal. In total around $3.2 trillion is estimated to be traded on the foreign exchange market each day, making it the world’s most liquid financial market.
The market was originally set up to cater for the supply and demand of different currencies by governments and companies, but individual currency speculators are now getting in on the act. Previously, the exclusive playground of banks, hedge funds, corporations and financial institutions, the advent of online currency trading platforms means the retail investor has as many opportunities as the professional.
Significant Returns
Forex trading is estimated to be growing at 30 per cent a year with investors seeking to take advantage of the fast moving markets and the opportunity to make significant returns in a short space of time.
“Forex is of growing interest in the current climate. It has a negative or low correlation to both bonds and equities and you can always hold forex in addition to these two,” says Stephen Gallo, head of market analysis, at London-based currency exchange provider Schneider Foreign Exchange. He suggests the diversification benefits means investors should put a third of their portfolio into currencies.
For those dabbling in forex for the first time, spread betting can prove the perfect introduction. It’s tax free and offers the ability to trade from as low as £1 per point, a sum that at conventional forex firms would be deemed too low. Pricing is also very transparent – the price quoted will mirror the price in the physical market place and the spreads you trade on are as tight as the interbank forex market.
The ability to trade on margin is also a positive. With rates typically of just 1 per cent, for an average £200 deposit you can trade up to a £20,000 position.
Furthermore, using a spreadbet provider means that all trades are worked in sterling, so whether you’re betting on the euro versus the dollar or even the Japanese yen versus the Polish zloty, every one-point movement translates straight into pounds, meaning that there is no exchange rate risk to worry about on the profit or loss.
Currencies are always traded in pairs, so when you are bullish on one currency, you are bearish on the other and vice versa. There are an estimated 84 different currency pairs to trade on, which can appear a bit daunting to a newcomer.
But in fact, currencies are deemed to be easier than say equities and commodities for the virgin spread better.
“Currency markets tend to respond in quite a predictable manner to fundamental news and with this follow a regular cycle – interest rate verdicts, changes in GDP, unemployment rates, etc,” says Adam Seagrave, senior trader at spread better CMC Markets.
Compared to the current equity market cycle of boom and crash, currency spread betting could prove a relatively safe haven in which to shelter from the storm.“
You don’t generally get the same one day crashes you get with stocks. Stock markets can gyrate wildly and sometimes run in a different direction to what you’d think given the economic climate, whereas currencies are directly related to a nation’s health and interest rate expectations,” says Dave Evans, strategist at fixed odds better Betonmarkets.com.
Risk Management
Good risk management, crucial for all spread betters, is also easier to work out when spreadbetting forex, according to David Jones, chief market strategist at IG Index.
“Because currencies are always about moves of x number of points, and spreadbetting is about trading in terms of pounds per point, it is very easy to figure out how big you should be trading and work out the potential profit versus the risk – so you can size your trades at a risk level that suits you,” he says.
But what should you actually be betting on? According to spread betting firms IG Index, CMC Markets and Capital Spreads, clients tend to stick to trades on the euro/US dollar and the pound/US dollar (also known as cable).
“They are generally the ones that clients know the most about and trade more often than any others,” says Angus Campbell, head of sales at Capital Spreads. “Especially with the euro being so important when looking at the oil and gold markets. Since they have been rallying so much in recent years, they have been the driver behind a stronger euro, as oil and gold are priced in dollars, investors have been buying into euros to counter the effect of higher oil prices in dollars.”
One of the most popular bets linked to the US dollar, is the non-farm payrolls data, released on the first Friday of every month, which measures the number of people in employment during the previous month, excluding farm-workers. A rising trend typically has a positive effect on the dollar and vice versa.
At IG Index, the first minute after they are released sees around 1,000 bets, four times the normal 250 bets a minute.
The next non-farm payroll data is out on 8 August, and some strategists believe that the euro/dollar exchange rate, which has been range bound for some time between around 1.53 and 1.61, could see a break out.
For those who want a buzz from their trading, forex offers a hit. And unlike some of the alternatives, you won’t get your socks wet.
What is the most exciting currency pair to trade at the moment?
James Hughes (CMC Markets): “The Aussie and Kiwi dollars are probably both worth watching at the moment. The Bank of New Zealand has just cut its rates and could this be taken as an indication that Australia will follow. The AUD has had a bumper run of late so any drop off in yields could certainly inject some volatility.”
Manoj Ladwa (Tradindex): “The majors are always popular– pound/US dollar, euro/US dollar and euro/pound. Anything against the dollar is attracting interest at the moment. Euro/US dollar is most exciting for me as it is quite volatile and within its main trend there are plenty of money making opportunities.”
Dave Evans (Betonmarkets.com): “A dollar pair. The US is at the epicentre of the financial storm we’re facing now, with the Fed stuck in a no win situation. If it raises rates to combat inflation, it risks decimating an already fragile economy. If it cuts rates then inflation, already at levels not seen for decades, could spiral.”
David Jones (IG Index): “Probably the pound versus the US dollar is the most exciting at the moment with something of an uncertain outlook for both economies – is there going to be a recession? Which way are interest rates going? This normally guarantees some quite volatile and potentially profitable moves.”