Spread Betting: Trading AUD/NZD
Both the Australian dollar and New Zealand dollar have common traits, with the countries having natural resources which mean that they benefit when commodity prices rise. In addition, much of the New Zealand trade is with Australia, therefore they are closely aligned and changes in the currency exchange rate between them impact their economies.
The New Zealand dollar is more dependent than Australia on agricultural prices, as farm exports comprise nearly 40% of all the exports from New Zealand. On the other hand, Australia is the third largest gold producer in the world, behind only South Africa and the United States, thus changes in this commodity pricing have a direct impact.
Both Australia and New Zealand trade extensively with Asia, including Japan and China. New Zealand’s trade with the UK, which used to be dominant a few decades ago, is now a shadow of its previous level, and despite some balance of trade issues in recent years it has largely rebuilt its industry to suit new world conditions.
The central banks of both countries are charged with looking after their economies, setting interest rates to control inflation and stimulate growth coupled with low unemployment. However, it appears there are some differences in approach, with the Royal Bank of Australia taking an ad hoc approach to interest rate cuts which are meant to stimulate the economy. In contrast, the Royal Bank of New Zealand has announced a planned approach to continuing interest rate cuts, and this has been reflected in the exchange rate between the two which has risen. Money flows to the country which treats it best, and a bank rate which is not planned to be reduced is better than one that which announces in advance further reductions.
Both economies are on sound footing, because of the natural resources which can only increase in value over time and underpin the values. However, the dependency on imports and exports exposes the economies to the world financial condition.
When considering the fundamental values of currencies, there are many factors which you need to take into account particularly if you are considering forex spread betting. To start with you need to judge the health of the economies by considering basic factors, which are usually readily available and updated frequently. For Australia and New Zealand, there may not be the political issues and the stability of the government that you have to figure in when assessing other countries.
One of the main measures of a country’s economy is the Gross Domestic Product (GDP), which is a broad measure of the total value of all goods and services produced by the country. Even this can be misleading as it counts the services, such as eating out, which do not directly add overall value to the society. However, it provides a general measure.
Other indicators of the health of the economy include the rate of inflation, the amount of industrial production, and how good sales are in the country. All of these fundamental factors give the foreign exchange trader a background for deciding whether currencies are over or under valued.
Spread Betting on the AUD/NZD
The Australian dollar and New Zealand dollar can be a volatile pair to spread trade on the Forex market, but they tend to be similar in reaction to the fundamentals such as commodity price changes. The current price for the AUD/NZD is 12,840.9 – 12,860.9. To time your spread bet, it is useful to use technical analysis on the charts. Suppose your analysis suggests that the New Zealand dollar is about to strengthen against the Australian dollar, you would need to place a short or sell bet on this pair, as the New Zealand dollar strengthening is the same as the Australian dollar, the first named currency, weakening. Say you bet £5 per point.
The price goes down, and you decide to close your bet when it reaches 12,632.6 – 12,652.6. To figure out how much you have won, first you have to work out the difference in points. As you took out a short forex spreadbet, it was placed at 12,840.9, the lower price, and closed at 12,652.6, the higher price. Therefore the number of points you gained is 12,840.9 less 12,652.6, which is 188.3 points. Your bet was for £5 per point, therefore you have won a total of £941.50.
Unfortunately, a lot of the time you will find that your bet goes the wrong way. This is just the nature of the financial markets, and doesn’t necessarily mean you did anything wrong when you chose the bet. But if the market goes against you, you must be quick to cut your losses and close the bet. Say it went to 12,893.6 – 12,913.6, and you closed your bet to protect your capital.
In this case, you still opened the spreadbet at 12,840.9, but it closed at 12,913.6. That means you lost 72.7 points. For your chosen stake that amounts to £363.50.
You might also be tempted to take out a forward style bet on the AUD/NZD. The current quote for that is 12,767.2 – 12,797.2. It is a bit lower than the daily price, suggesting that the market thinks that the rate will go down in future. If you disagree and favour the Australian dollar, you might want to place a long bet for £4 per point, which would go on at 12,797.2.
Suppose that you are right, and that the spread bet quote goes up to 12,956.9 – 12,986.9, you could close your bet and take your winnings. Your bet went on at 12,797.2, and closed at 12,956.9, which means you gained 159.7 points. As you bet £4 per point, this amounts to £638.80. Unlike the daily rolling bet which charges or pays to your account each night when the bet is rolled over, there is no other adjustment.
Once again, if the market has gone the wrong way you would have to cut your losses and close the trade. Say it went down to 12,726.9 – 12,756.9 and you closed the bet. This time, you have lost 12,797.2 less 12,726.9, which is 70.3 points. For your chosen stake, your total loss is £281.20.
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