Currency: If you have a yen to make your mark ... By Lucy Warwick-Ching Published: September 25 2009 01:59 | Last updated: September 25 2009 01:59 The fall of sterling against leading currencies in August will have hurt the pockets of anyone who holidayed abroad rather than in the UK. But spread betters were able to use this weakness to their advantage, as it provided them with a profitable one-way bet. Over the past 12 months, spread betting providers have reported a sharp increase in the number of currency bets, as economic uncertainty and interventions from governments to stimulate recovery have triggered movements in the dollar, euro and sterling. Rob Woolfe, head of foreign exchange at ETX Capital says that one of the factors holding down sterling in recent months has been the view that UK interest rates will stay low as the economy struggles. Interest in betting on foreign exchange rates increased at the start of the year, when sterling fell against the dollar to $1.35, its weakest point since 1985, after a government rescue plan for British banks prompted concerns about the nation’s escalating debt problem. “We believe sterling will remain under pressure in the short term, on the view that the Bank of England is delving deeper into quantitative easing while other central banks may be winding down measures to stimulate economies,” says Mr Woolfe. “Currency movements are about supply and demand. When sterling is in demand, it will rise in value, but if the Bank of England floods the market with billions of pounds it will cause sterling to come off.” A further fall in sterling came when Bank of England governor Mervyn King warned the UK recovery would be “slow and protracted”. He said the recession “appears to have been deeper than previously thought”. “The economic outlook looks bleak for the UK compared with other G10 economies, as Germany reports positive growth,” says Neil Looker, chief FX dealer at City Index. “We also note that both the ECB and the Fed have started to hint at exit strategies from their quantitative easing programmes,” he adds. Other experts are more positive about sterling however, and Aaron Gurwitz, managing director and head of the global investment strategy group at Barclays Wealth in the Americas, believes sterling is undervalued against the euro. Providers say that foreign exchange betting tends to revolve around four currencies: sterling, the dollar, the euro and the yen.
Sterling bets are particularly popular with UK clients, as investors often have an affinity for their home currency. The most popular longer-term currency positions tend to be in dollarsterling, euro-dollar and dollar-yen. The way to profit from exchange-rate movements is to “short” the market and speculate that a currency will continue to fall, or rise, against another currency. Investors can buy at the upper end of a spread – if they thought the pound would strengthen – or sell at the lower end if they thought it would weaken. Angus Campbell, head of sales at Capital Spreads, says clients who believe that sterling will weaken against other currencies can make “sell” bets to back their judgment. He gives the example of using a spread on the pound against the dollar of 1.6200 to 1.6203 and says you could sell for £1 a point at 1.6200 believing that sterling will weaken against the US dollar. “Let’s say that by December of this year, “cable” *sterling+ has fallen by some 5 per cent to a price of 1.5400 and the Capital Spreads price is now 1.5398 to 1.5401. “You can buy £1 at 1.5400 to close your bet and your profit would be £799 ($1,307).” Investors can also trade sterling against the euro and sell if they think sterling will weaken against the euro. Mr Campbell says: “This pairing is currently priced at 1.1370 and the Capital Spreads quote is 1.1368 to 1.1372. You can sell at 1.1368 and for every point the buy price falls below 1.1368, you’ll make a multiple of your stake.” As with most financial investments, the popularity of currency pairs changes over time, and there are other currency pairs that could potentially offer further scope for profit such as the New Zealand and Canadian dollars and the South African rand. “Recent months have seen an emphasis of trading on some of the smaller currencies, such as the New Zealand and Canadian dollars, and the South African rand,” says Mr Woolfe. “There is potential for the Australian government to increase interest rates in October, so that has strengthened the Australian dollar in recent days.” He says that carry trades – the sale of holdings in low yielding currencies and investment into higher yielding ones – are also becoming increasingly popular, meaning bookmakers take more from the trade and prices are less competitive than those of tighter spreads. Investors are not short of choice. City Index offers more than 40 currency pairs to trade and rival IG offers trading in some 60 currency pairs. However, trading smaller currencies requires a larger risk appetite, as the currencies can suffer from extremes of movement and spread betters need to be disciplined in their positions. The principles of spread betting
Experienced trader Vince Stanzione sets out ten key rules to follow if you want to make profitable use of spread betting: 1. You can make money in all market conditions 2. Start small and build up 3. Diversify 4. Know your personality and trading style 5. Money management is the key to survival 6. Cut your losses and let winners run 7. Treat financial spread trading as a business 8. Don’t get carried away by technology 9. The crowd (and the media) are normally wrong 10. Don’t feel you must trade all the time. Vince Stanzione has produced a home study course to teach private investors how to benefit from trading financial spread bets and fixed odds, priced £347. For details, visit www.fintrader.net