Spread Betting: Trading NZD/USD
Trading on the New Zealand dollar versus the US dollar (NZD/USD) is one of the lesser-known combinations, and you need to do your homework to understand how this currency pair will work. The two economies are very different, and driven by different world factors.
A few decades ago, New Zealand’s economy depended on just a few agricultural products, such as dairy and sheep, both for wool and for meat. When the UK joined the European Common Market in the 1970s, New Zealand lost its favoured position and living standards declined. However, the government took steps to encourage a more industrialized economy which did not depend so much on British involvement, and incomes in New Zealand rebounded.
During those years, New Zealand suffered comparative poverty, high inflation and unemployment, from which it has emerged. In many ways, New Zealand’s revival is a success story, with inflation being kept in check, but with a heavy dependency on international trade its economy is closely linked to the fortunes of other countries. Agriculture is still a large part of the economy, and tourism has been encouraged.
Throughout it all, New Zealand has depended on its efficient agricultural prowess, which contributes to its exports. In contrast, manufacturing has been less important. Trade has expanded to embrace Asia, and China is the second largest customer, second only to Australia. In fact the Kiwi has been benefiting from the strength of the Chinese economy. While dependent on oil imports, less than 30% of the country’s electricity is generated with oil, and hydroelectric power is the major source of power, in contrast to many other major industrialized nations.
Because of its dependency on exports, New Zealand was affected by the global economic crisis in 2008/2009, and has a continuing problem with a trade deficit. To some extent, the situation is mitigated by the strong ties it has with Australia, with treaties that allow for free trade. Recently, the New Zealand government has taken steps in an attempt to cool down the spiraling residential property market while the finance minister has warned that the strong Kiwi was harming exports.
The US dollar is the international currency standard, and holds a special place in foreign exchange transactions. The US economy has been somewhat battered in recent years, with first the technological bubble and then the housing bubble upsetting the economy, and the record unemployment rate is slow to come down. The value of the US dollar has been maintained mainly because of its special position, and significant additional currency has been brought into the market for ‘quantitative easing’, and to bail out ‘too big to fail’ financial companies.
Despite the U.S. Constitution stating that the debt of the United States shall not be questioned, politicians have endeavoured to stall increasing the “credit line” to attain their own political ends, and this was a factor in the downgrading of the US credit rating. No realistic solution to the trade deficit has yet been advanced or agreed.
These are the fundamentals for the New Zealand economy and that of the United States, and it is against this backdrop that you can spread trade on the NZD/USD currency pair. In many ways, the New Zealand economy appears in better shape, but the sheer size of the US in the world trade suggests that the dollar will remain sound, if depreciating over time due to further issuing of currency.
Spread Betting on the NZD/USD
The typical daily range of the NZD/USD is about 100 points, and it is a volatile index with values between 6600 and 8800 in the last year alone. The current price is 8225.1 – 8227.1 for a daily rolling spreadbet. If you think that the New Zealand dollar will do better than the US one, you could place a long bet at £3.50 per point. This would go on at the buying price of 8227.1.
If you are correct, and the price does go up then you might take your winnings when the quote reaches 8418.8 – 8420.8. While you have held the bet, your account has been charged each evening a small amount of interest as it was rolled over to the next day. Usually, the amount charged is not significant compared with the profits you make from the trade. Here is how you work out how much you have won: –
- Your bet was opened at a price of 8227.1
- The bet closed at 8418.8
- The number of points you gained is 8418.8-8227.1
- This works out to 191.7
- Your bet was for £3.50 per point
- Which means you won £670.95
Not all of your bets will succeed. If this one fails, you might decide to close the bet and limit your losses when the quote goes down to 8186.5 – 8188.5. You can figure out your loss like this: –
- Your bet was opened at a price of 8227.1
- The bet closed at 8186.5
- The number of points you lost is 8227.1 less 8186.5
- This works out to 40.6
- Your bet was for £3.50 per point
- Which means you lost a total of £142.10.
You might also take a forward bet on this pair, if you know that you want to be able to hold onto it for a few weeks without being charged interest. You can still close it as soon as your profit target is reached, but in the meantime there are no charges to your account. The current quote for a forward bet is 8163.9 – 8169.9, and this bet expires in five months – this means is that if you held it that long you would have to close it then. If you thought that the US dollar was going to rise, relative to the New Zealand dollar, then you could take out a short or sell bet on this currency pair. Perhaps you would stake £3 per point.
Assume that the price quote drops to 7974.2 – 7980.2, and you close your bet to collect your winnings. This is the calculation: –
- Your short bet opened at 8163.9, and closed at 7980.2
- You have won 183.7 points
- Your stake was £3 per point
- Therefore your total winnings are £551.10
Once again, you may have to figure out your losses sometime. Say the price went up to 8196.2 – 8202.2, and you closed your bet. Do it like this: –
- Your short bet opened at 8163.9, and closed at 8202.2
- You have lost 38.3 points
- Your stake was £3 per point
- That means you have lost a total of £114.90
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