Spread Betting: Trading AUD/CAD
Getting away from the usual currency pairs that are traded, you might like to spread bet on the Australian dollar versus the Canadian dollar (AUD/CAD), the aussie versus the loonie. These economies are very different from European ones, and you need to study their characteristics before risking your money.
They do have similarities. Both Australia and Canada have large open spaces and sparse population, and can supply large quantities of commodities. That is one reason that both economies will be affected if commodity prices rise or fall. In particular, both countries have witnessed their respective currencies appreciating sharply in value, as they mine resources out of the ground and sell them. In this respect these currencies can both be expected to go in the opposite direction to other countries, where the economies in general suffer if the price of commodities increases. With a good supply of commodities both countries’ currencies tend to increase when values go up.
The Australian dollar is the fifth most traded currency in the world, behind the expected leaders of the US dollar, Japanese yen, euro, and pound sterling. Its popularity is to some extent because it tends to offer relatively high interest rates, together with little government interference and what is regarded as a stable economy. It also has the physical advantage of larger exposure to Asian economies, bringing some diversification.
The Canadian dollar is the eighth most traded currency in the world. Whereas the commodities that Australia is well known for are all types of mined metals, such as copper, gold, and even uranium, and for having a great agricultural program, Canada is better known for its oil, particularly recently with the discovery of oil sands. In fact, Canada is the largest supplier of crude to the United States, its neighbour, providing much more oil than any Middle East country to the US.
The Canadian banking system has also proven to be a most stable environment for investors, and the citizens of Canada benefit from a high level of welfare. While traditionally in most countries the national bank is expected to intervene, usually by setting interest rates, to promote growth, restrict inflation, and keep down unemployment, the Bank of Canada has not had reason to intercede for at least a decade.
So you can see that in many ways neither country is typical of the mainstream, and to trade on this currency pair means that you may need to re-think some of the wisdom that you have learned from other Forex trading. This is not to discount all the conventional indicators that can tell you which way an economy is heading. Both countries are still subject to balance of trade figures, and unemployment reports, for instance. Inflation has not been an issue in recent years, but both were affected by the global economic crisis, particularly as they have large export industries and other countries were less able to afford their goods.
Canada and Australia have also clearly benefited from the emerging economies ever-increasing appetite for mineral resources; particularly supported by demand originating from China. This has fuelled GDP growth in particular as employment, wages and inflation have all risen in tandem in the respective countries. However, should demand slow down, commodity prices will fall and this may negatively impact unemployment and lead to declining currency values even though both countries have tried to responsibly manage growth by prudent governance and conservative debt policies.
Finally, for timing your spread trades on this Forex currency pair, you need to study charts of the price using technical analysis to determine the mood of the market. Combine conventional indicators with candlestick charting, and you have the best information available to make a profit from the currencies.
AUD/CAD Spread Betting Example
Just one look at the AUD/CAD (Australian dollar versus Canadian dollar) chart will show you why many spread betters are excited to trade on this currency pair. In the last year it has swung about 10%, 400 points days are not unknown, and swings of 100 or 200 points per day are common. The current quote for a rolling daily bet is 10,680.6 – 10,697.6.
If you think that the Australian dollar is going to lose value relative to the Canadian dollar, then you want to take a short position on this currency pair, selling at 10,680.6 at a price of, say, £2.50 per point. If you are correct, and the price goes down, then you might close the position, cashing in your bet when the quote is 10,286.1 – 10,303.1.
You opened your bet at 10,680.6, and it closed at 10,303.1, 377.5 points lower. As it was a short bet, this represents a profit to you. You bet £2.50 per point, therefore you have won £943.75. With a rolling daily bet, your spread betting company may charge you interest each night when a long bet is rolled over; but with a short bet, if anything they should be paying you a slight interest charge each night.
No matter how well you analyze the market, you will have your share of bets that go the wrong way. Say that the price increased after you placed your bet, and you decided to close your bet and accept your loss when it reached 10,721.5 – 10,738.5. Even though the price has going up, your short bet still closes on the higher price which is 10,738.5.
Your spreadbet originally opened at 10,680.6, and then you closed it at 10,738.5. That means you lost 57.9 points. Your stake was £2.50 per point, so that works out to a total loss of £144.75.
It is just as easy to place a spread bet in the opposite direction if you think that the Canadian dollar will lose value against the Australian dollar. This is the same as the Australian dollar going up, so you need to place a long bet. Perhaps you will place a bet for £4.50 per point at the buying price of 10,697.6.
See now that the price goes up to 10,868.7 – 10,881.7, and you close your bet for a win. You bought at a price of 10,697.6, and closed by selling at a price of 10,868.7, which means you gained 171.1 points on the bet. Multiplying this by your stake, your total profit works out to £769.95.
One of the secrets of successful forex spread betting and financial trading in general is that you limit your losses and preserve your capital. If the spreadbet goes against you, you do not want to wait too long before closing it and accepting the loss, even though this is difficult to do. Say the price drops to 10,632.9 – 10,649.9, and you decide that you need to cut your losses. The long bet closes at 10,632.9.
The bet opened at 10,697.6, and closed at 10,632.9, giving you a loss of 64.7 points. At your chosen stake of £4.50 per point you lose £291.15.
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