Spread Betting: Trading USD/ZAR
I don’t know if you have ever visited South Africa, but it is very different from any other place, and its economy is also strange to Western cultures. Some say that the quality of life compares favourably with other countries, but this depends whose life you are talking about. Although discrimination between cultures was officially ended in the 1990s, there are still marked divisions in society.
ZAR is the currency code for South African rand, and the USD/ZAR gives the exchange rate for one US dollar. The South African economy is based on foreign trade, and it is a major economic power in Africa, producing 20% of all goods from that continent. Mining is one of the industries which is associated with South Africa, which is known for its gold and diamonds, but it has become less important in recent years. Having said that, higher gold or diamond prices can help push the South Africa rand higher. Exports include agricultural and chemical products, machinery, vehicles and electrical appliances, and imports consist mainly of manufactured goods, as most of the raw materials are available in the country.
The developed areas tend to be concentrated in Johannesburg, Durban, Cape Town, and Port Elizabeth, and elsewhere there is still a lot of poverty. Taken as a whole, the economy has been doing well with the rand steadily increasing in value in recent years. Surprisingly, the unemployment level is well above 20%, marking the deep divide between the haves and the have-nots. In time a weak rand is likely to help the South African economy.
Compared to South Africa, the United States has had a much more steady history, even though in recent years as South Africa has improved the US has declined. As the international reserve currency, the US dollar has a guaranteed value, unsupported by gold reserves, which allows the administration to print money for quantitative easing, and this is the path that the US has taken following the global economic crisis. Although most economists agree that manufacturing more money will lead to increased inflation, it seems that the calculation has been made that recovery is more important than future values.
The United States, at least until recently was not the most indebted region of the world, that dubious distinction going to the European Union, which to be fair is not one country but a collection of them. The unemployment rate in the US, although not at the levels of South Africa, is still distressingly high at just under 9%. And the US is a consumer driven society, with many of the population surviving on credit in order to maintain their standard of living rather than adjusting their lifestyle.
Both of these currencies have their issues, therefore, and betting on the currency exchange rates becomes a matter of which issues are considered more important at any particular time. Further, as the markets discount and scale down the expectation of aggressive quantitative easing tapering by the Federal Reserve, the dollar weakens against the South African rand as less tapering means that the Fed continues to print money and upbeat for emerging economies like South Africa as an easy monetary policy boosts global growth and trade. But the figures are freely available, covering industrial output, employment numbers, imports and exports, and the fundamentals can provide an overall trend to the market. With so many traders in the dollar, it is essential that you understand the sentiment of the market, and apply technical analysis to choose the right time and direction to bet.
Spread Betting on the USD/ZAR
The USD/ZAR stands for the currency conversion rate between the US dollar and the South African rand. The current quote is 76,770.0 – 77,070.0 for the daily spread bet, in other words a US dollar buys about 7 ½ rand. If you think that the US dollar is going to go up in value against the rand, then you would want to place a long bet on this currency pair, betting say £1.25 per point. Suppose that the price does go up, and you decide to close the bet when it the price reaches 78,562.0 – 78,862.0.
As it was a long spreadbet, it went on at the higher number of 77,070.0 and closed at the lower number of 78,562.0. The difference between these is 1492.0 points. Your stake was £1.25 per point, which means you won £1865.
This currency pair has higher numbers than most pairs and it is not unusual to see daily swings of 1000 points or more. This means that you should be careful to limit the amount you bet, in case you lose. Suppose the price dropped to 76,450.0 – 76,750.0, and you closed the bet to limit your loss. You have lost 77,070.0-76,450, which is 620 points. With your chosen wager, this bet cost you £775.
Whenever you spread bet or trade on the financial markets, it is important to realize that, no matter how much care you take with your selection of bet, the market can turn against you and give you a loss. Even winning traders have their share of losses, and one of the ways they win is to make sure that the amount they can win each time is much more than the amount they lose. That way they can lose as many times as they win and still make a profit.
As a second example, consider that you may decide that the US dollar is going to go down relative to the South African rand, and place a short or sell bet for £.60 per point on this pair. As it is a short bet, it goes on at the lower price of 76,770.0. Perhaps you are correct, and you choose to take your profit when your spread betting provider is quoting 74,555.0 – 74,855.0. The profit on a short bet is just as easy to work out as a long bet.
Your spreadbet started at 76,770.0, and closed at 74,855.0. As it closed lower, your short bet won, and the difference in points is 1915. Your bet this time was for £.60 per point which gives you a profit of £1149.
But if the index started going up, you might reconsider your bet and decide to close it quickly to minimize your losses. Say that it went up to 77,230.0 – 77,530.0 and you saw no hope it will come down soon, so you closed the bet. The bet went on at 76,770.0 and closed at 77,530.0, which means you lost 760 points. With your chosen stake, this works out to £456.
The South African rand has been a very popular play during the last few months as the country’s huge mining industry was hit repeatedly by sudden labour unrests that have forced several miners to stop production. November 2012 saw the rand hitting new lows against the dollar for more than three years and the near-term picture indicates that further market turmoil may yet to come. On the other hand, if mining companies and unions finally resolve their disputes, the rand should witness a recovery, particularly as the stoppage has already pushed up prices of some of the country’s most important exports.
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