Spread Betting: Trading EUR/ZAR
The EUR/ZAR is usually ranked as an exotic foreign currency pair, although IG Index lists it in the minor FX category. It is the currency exchange rate between the euro and the South African rand, and most traders also consider it to be a volatile pairing.
You can see the volatility by looking at the length of the candlesticks on this daily chart, as well as by considering the 13% move in just a couple of months. If you are able to tame it, this currency pair offers great possibilities for profit.
Of the two economies, the South African rand is the most interesting because of its unfamiliarity. Certainly, South Africa used to be a colony of the Dutch and the British, but there were many changes in the 20th century. South Africa is in the emerging nation category, and in 2010 was added to the acronym BRIC to form BRICS (Brazil-Russia-India-China-South Africa). China is the top destination for exports from South Africa, provides many of the imports, and is a dominant investor.
The economy is dominated by sales of natural resources. South Africa is the world leading producer of metals like gold, platinum, and chromium, and is known for its diamonds. Increasing commodity values have been to its benefit. These factors make some observers believe that the South African rand is still undervalued, and attractive for foreign investment. On the opposite side of the equation, unemployment is over 20%, and inflation is nearly 5%, both signs that would be troubling if not unacceptable in many other economies.
The history of the rand shows how volatile this country has been. The USD/ZAR, the US dollar against the South African rand, has varied from 0.67 in 1973 to 12.45 in 2001. It is currently just under eight. Out of all the countries on the African continent, South Africa ranks highly, and is counted as having a good standard of living, even though there is some evidence to the contrary in the remoter areas.
Compare this to the European economies which use the euro. There are many of these since the treaty of 1999, and they vary from the strength of Germany in Western Europe to the relative collapse of Greece in recent times. This makes analysis of the euro more complex, as it depends on the amalgam of countries that use it. However in practice, Germany is such an economic powerhouse that it tends to overwhelm the effect of the weaker countries when it comes to economic matters.
The European countries are part of the “first world” economies, and consequently are very different from South Africa. They can be analyzed with more familiar tools, such as GDP, rate of inflation, unemployment, industrial output, and the like, and the answers would be as expected. To analyze South Africa with the same measures would be an exercise in futility, so all you can do is compare the direction South Africa is heading in this year with last year, or this week with last week.
Spread Betting on the EUR/ZAR
The current rolling daily spread bet on the EUR/ZAR is at 102,089.5 – 102,389.5 with IG Index. Although this shows a spread of 300, obviously the numbers are much larger than with most other pairs of currencies, and the chart can show more than 1000 points difference in a day. When spread betting on the euro versus South African rand, you should be careful with your stop loss levels and your position sizing to avoid too much capital loss.
If you think that commodities are going up, you may associate this with the rand increasing in value too, and want to take out a bet for this. For this pairing, the rand increasing is the same as the euro falling, and therefore you need to take out a short or sell bet. Being careful with the large swings that can be seen, perhaps you place a wager of just £.30 per point.
If you are right, and the South African rand increases in value relative to the euro, the spread betting quote may drop to 99,562.1 – 99,862.1. Closing the bet, you work out how much you have won.
- Your short bet went on at 102,089.5.
- The bet closed at 99,862.1.
- That means that you made 102,089.5-99,862.1 points.
- Which is a total of 2227.4 points.
- Multiplying by your stake of £.30, you made £668.22.
If the price did not go in your direction, you might have to close the bet and accept a loss. Say the quote went to 102,321.0 – 102,621.0, and you closed your trade.
- Your short bet went on at 102,089.5.
- The bet closed at 102,621.0.
- That means that you lost 102,621.0-102,089.5 points.
- Which is a total of 531.5 points.
- Multiplying by your stake of £.30, you lost a total of £159.45.
Although the South African rand is becoming more popular with currency traders, not all spread betting companies carry it, so you may have to shop around. As another example of a spread bet on this pair, perhaps you think that the rand will fall in value, and therefore want to place a long bet, betting that the euro will increase. Looking at the original price, this would be at 102,389.5, and you might stake £.20 per point.
If the euro does strengthen, perhaps you will close your bet when the quote gets up to 104,692.6 – 104,992.6. This is how you work out your winnings: –
- You opened your bet at 102,389.5
- You closed your bet at 104,692.6
- This gives a point difference of 104,692.6 minus 102,389.5
- A total of 2303.1 points
- Your stake was £.20 per point
- Therefore you won £460.62
On the other hand, you may have made an error in your analysis, and the rand strengthens, sending the quote to 101,867.2 – 102,167.2, where you close it to cut your losses.
- You opened your bet at 102,389.5
- You closed your bet at 101,867.2
- This gives a point difference of 102,389.5 – 101,867.2
- A total of 522.3 points
- Your stake was £.20 per point
- Therefore you lost £104.46
Being an exotic pair the EUR/ZAR tends to experience higher volatility which comes with both higher opportunities for profit and extra risk. For instance over a 3-day period in early October 2012, the USA dollar moved in an almost 150-point range versus the euro, but against the South African rand it moved about 300 points. This may sound great if you are on the correct side of a trade but can be a painful experience if you’re unfortunate enough to be on the other side.
Join the discussion