Spread Betting: Trading NZD/JPY
The New Zealand dollar versus the Japanese yen is a foreign currency pairing that is not traded much, but it offers great possibilities for someone who is prepared to put in the research, as it shows good volatility. In some ways, these countries are very similar, yet their economies differ greatly.
For many years, the New Zealand economy was tied in with the UK by special trading agreements. New Zealand lamb, one of the staple meats of the English diet, was one of the obvious indicators of this. However, when the UK joined the European common market in the 70s, New Zealand had to seek other outlets for its goods.
New Zealand is blessed with a number of resources. Agriculture is still a large part of the economy, which includes forestry and fishing. However, industrial products have also become prominent. Fortunately, New Zealand’s topography allows a great deal of power generation from hydroelectric plants, so it is less pressed to use the world energy markets. It has been running a trade deficit for a number of years, but there is hope that this will improve. Most of the trade is now with Australia, its nearby neighbour, and Asia also figures in its exports.
Although similarly a relatively small island country, Japan it is markedly different in its outlook and approach to the world. It has achieved notable success with its exports, as evidenced most visibly by its motor industry, and its technology such as electronic consumer goods. It does not have the natural resources of New Zealand, and therefore its economy thrives by importing raw resources and adding value to them through manufacturing.
Japan has also had some setbacks recently, including the tsunami of 2011 and consequent nuclear power plant disaster, which though it has left the headlines still impacts the economy. However, Japan’s economic story was hit by declines earlier than this, with an economic housing price bubble crash in the 1980s. It has now become the third largest economy in the world, having been overtaken by China. The 1990s were marked by slow growth, and sometimes called the Lost Decade.
These are the basic facts of two changing economies that have developed in different ways. This gives us some clues as to how to exploit a diversity to spot any fundamental trends in the relationship of the currencies. For instance, with New Zealand having a large amount of natural resources, when commodity prices rise it will tend to favour New Zealand over Japan, which has to import most of its goods. With so many consumer goods created by Japan, any time the world economy is picking up, Japan is sure to sell its share and therefore will become more valuable.
However, when you are spread betting on the NZD/JPY you must also be aware of the day to day changes, and these cannot be anticipated simply on the fundamentals which give you the overall trends. You need to apply technical analysis to the charts, using whatever indicators you find work best for this currency pair in order to time your spread trades.
Spread Betting on the NZD/JPY
The weekly chart of the New Zealand dollar versus the Japanese yen is shown above, just to illustrate the volatility of this pair. This is something that allows you to make good profits, provided you have a good spread trading plan, and can limit your losses. You can see how the Bollinger bands work well, providing limits to upper and lower pricing.
The current price is 6299.0 – 6304.0 for a rolling daily bet. You can see from the chart above that the Bollinger bands are narrowing, which often presages a breakout in one direction or another. If you think that the New Zealand dollar is going to strengthen against the yen, you could place a long bet for £1.50 per point at 6304.0.
Suppose that the spread betting quote goes up, giving you a win. The current level of price resistance is about 6800, so you close the bet when the quote is 6752.6 – 6757.6. You can simply calculate how much you won by multiplying together the number of points you gained and your stake. Your long bet closed at the lower price of 6752.6, which means you gained 448.6 points (6752.6-6304.0). For a stake of £1.50 per point, you have won £672.90.
If instead of going up, the price had come down, you might have closed it to limit your losses when the spread betting quote was 6223.7 – 6227.7. In this case, you would have to calculate how much you had lost. The bet went on at 6304.0, as before, but this time you closed the bet at 6223.7. That means you lost 80.3 points. Multiplying that by your stake, you lost £120.45. In addition, because this was a rolling daily bet, there would have been a small interest charge to your account each evening when the bet was rolled over.
If you follow the chart above, and decide that the price is going down, in other words the Japanese yen is going to get stronger, you might put in a target of about 5800. Placing a short bet for £2.50 per point at the selling price of 6299.0, you wait and see what the price will do. Suppose you are right, you could close the bet for a win when the quote drops to 5862.1 – 5866.1, and as this is a short bet it closes at the higher price of 5866.1.
The number of points you gained is 6299.0-5866.1, which is 432.9 points. With a stake of £2.50 per point, that works out to £1082.25 that you have won.
Again you must consider the case that the price goes against you. For instance, if it breaks through the upper Bollinger band, you have probably got the direction wrong. Say it goes up to 6405.2 – 6409.2, you might have to close the bet and limit your losses.
The bet went on at 6299.0, and you closed it at 6409.2. That means you lost 6409.2-6299.0, or 110.2 points. With your given stake, that amounts to £275.50 that you lost.
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