Spread Betting: Trading EUR/AUD
When you spread bet on the EUR/AUD, you are placing a currency bet on the relative merits of the economies of a number of European countries, the ones which partake in the common currency, and Australia. These economies are very different from each other, and you need to understand the characteristics of each in order to see the tradable trends.
The Australian economy in particular has changed a lot in the last few decades. Thirty years ago, it was regarded as a protectionist economy with a lot of trade with Europe and North America. Now it is much more connected with China, and serving Asia’s needs. The recent slowdown in the Chinese economy is reflected back to Australia, but in general it has been doing well recently.
During the period 2008 to March 2013 the Australian dollar has been broadly rising against the euro. Is a pullback due?
For instance, Australia is self-sufficient in food and has many valuable mineral resources, ranging from the mundane coal and iron, through uranium, to precious materials such as gold and diamonds. Consequently, its balance of trade is usually in the black. It is highly industrialised, manufacturing many goods for export, although mining and agriculture comprise about 10% of its gross domestic product and more than half of its exports.
Because of its reserves of commodities, you can expect the Australian dollar to benefit when commodity prices rise; and conversely, to weaken if commodities fall in value.
The euro is the currency of most of the European common market countries, with the notable exceptions of the UK and Switzerland. As such, it is influenced by the economies of many countries, which vary from the strength of Germany through to the weakness of Greece and possibly some others. This makes it more complex to analyse. In practice, the major industrial economies of a handful of countries are dominant, so you can form a good idea of the health of the euro by looking at the figures for just a few regions.
Europe has been the latest victim of the global economic crisis, and is unlikely that it will recover quickly or soundly, given the tensions that are rife between the constituent countries. However, while the alliance exists there are tremendous resources being brought to bear to prevent total collapse.
The crisis has somewhat benefited the Australian Dollar. The relative health of the domestic economy and the reflective interest rate settings have stood the AUD in good stead to capture trade activity away from the likes of EUR and USD, both of which have had major crosses to bear in recent times. The main contributing factor to this strengthening has been an economy supported by commodities. Anyone who has ever travelled around Australia will report having chains of small towns serving huge open-cast mines that pull all sorts of riches out of the ground to be sold to the world’s fastest growing emerging markets. Nice work if you can get it, but this factor has also become something of an Achilles heel.
The AUD has tumbled sharply lately. The reason? China. Or rather the knock-on effects its economy has to suppliers. The Australia Reserve Bank brought down interest rates citing the Chinese slow down – and later, in more detailed minutes, the trouble in the eurozone – rather than internal problems with the domestic economy per se.
Economic numbers from China have been softening as well as exports there from Australia. There have also been improvements in the economic outlook of the US, which has strengthened USD against AUD.
Spread Betting on the EUR/AUD
For both these currencies, the overall trends can be gauged by looking at the standard details, such as gross domestic product, the job outlook, rates of inflation, and other fundamental criteria. When betting on financial markets, it is generally agreed that trades made in direction of the overall trend are safer, so it is a good idea to bear in mind the forward-looking outlook.
However, spread betting, even on futures based products, is basically a short-term trading activity and as such you cannot time your bets by considering only the fundamentals of the economies. Some traders like to look to government announcements, such as job reports, and trade on the almost inevitable currency moves that follow these. Others find this a dangerous policy, as the moves may result in quick unexpected shifts, so they follow other technical analysis, including candlestick charting, to time the entries and exits into the market.
AUD may not move as erratically as other currencies but its movement can be somewhat defined and quite easy to follow.
The European and Australian economies are very different, although both have been affected by the global downturn. Australia is a large country with many resources, and these will affect the value of its currency. If you are bullish on the euro in comparison to the Australian dollar, then you would place a long bet on the EUR/AUD, staking say £11.25 per point for the price, which is currently quoted at 12,511.9 – 12,535.9 for a futures style bet.
Imagine that the price goes up to 12,786.2 – 12,810.2, and you decide to close your bet and collect your winnings. You can work out how much you won by figuring out how many points you gained.
- You opened your long bet at 12,535.9, the buying price.
- Your bet closed at 12,786.2, the selling price.
- Therefore you gained 12,786.2 less 12,535.9, which is 250.3 points.
- Your stake was £11.25 per point.
- Multiplying this out, you have won £2815.87.
In the real world, you will have bets that fail, and go the wrong way. Suppose the price went down to 12,475.7 – 12,599.7, you might have to accept your losses and close the bet. You can figure out your loss in the same way.
- You opened your long bet at 12,535.9, the buying price.
- Your bet closed at 12,475.7, the selling price.
- Therefore you lost 12,535.9 – 12475.7, which is 60.2 points.
- Your stake was £11.25 per point.
- Multiplying this out, you have lost £677.25.
Suppose in the beginning you were bullish on the Australian dollar instead, it is simple to place a bet in that direction too. For this currency pairing, being bullish on the Australian dollar is the same thing as being bearish on the euro, so you want to place a short or sell bet on the pair. Say you staked £2.50 per point in this direction, it would go on at the selling price of 12,511.9.
If the market goes your way, you might close this bet when the price has dropped down to 12,342.0 – 12,366.0. With a short bet, it closes at the higher price, in this case 12,366.0.
- You opened your short bet at 12,511.9.
- It closed at 12,366.0.
- That means the price dropped 145.9 points, which is your gain as you bet it would go down.
- With a stake of £2.50 per point, you would have won £364.75.
Any time you place a spread bet, you need to know how far you are prepared to let it go against you before you close the bet and cut your losses. When you figure this out, you will be looking at the chart, considering the volatility of the price, support and resistance levels, etc. If the quoted price went up to 12,582.4 – 12,606.4, this might be a level that you needed to close your bet to preserve your trading capital.
- You opened your short bet at 12,511.9.
- It closed at 12,606.4.
- That means the price went up 94.5 points.
- With a stake of £2.50 per point, you would have lost £236.25.
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