Exotic Alternatives to Trading Major Currencies

Of the trillions of pounds traded daily on foreign exchange markets, approximately 90% of transactions involve the most popular, or ‘major’ currencies, such as the US dollar, the Euro and the UK pound. But to be profitable in spread betting, you do not necessarily have to follow the crowd. Is it time for you to consider the ‘exotic’ alternatives to trading the major currencies?

Currencies are traded in pairs and traders speculate on the price performance of one currency against another. Excluding extraordinary events, the major currency pairings are generally consistent and relatively predictable performers, reflecting the stable economies of their countries of origin. The EUR/USD is the most highly traded pair, with a daily trade volume of nearly 30% of the entire forex market.

Searching for Greater Potential

However, because major currencies are bought and sold in such large volumes and have a relatively low volatility, they come with quite narrow spreads, but slower potential profits for spread bettors. If you would like to take on the challenge of speculating under more highly volatile trading conditions with the intention of higher profitability, exotic pairings may be for you.

Exotic pairings are comprised of one major currency paired with the currency of an emerging or smaller economy. As these currencies are bought and sold in such large volumes, they come with quite narrow spreads and include currencies from parts of Asia, such as Hong Kong or Singapore, European countries outside of the Euro Zone, as well as the Pacific, the Middle East and Africa.

The political, economic and financial environment for these smaller and emerging economies can change quickly. As a result, these currencies tend to make quicker and larger moves. One example of this is the Russian Ruble, which moved from 33.5 to 39 per USD in just two months because of the 2014 Ukrainian conflict.

A Warning to Starters

The volatility of exotic currency pairs can make for good opportunities for larger profits, and can be very attractive to experienced traders, fund managers and individual investors looking to diversify their portfolios. However, at the same time, exotic currency pairs present a greater risk of loss. This increased risk is why many advise those new to trading and those with limited capital against speculating on exotic currencies.

Nonetheless, exotic currencies can certainly provide a bit of excitement. Of course, the final decision is up to you, but your thinking should always be a part of a carefully considered overall trading strategy.

The very fact that the nations home to exotic currencies are emerging markets can make it difficult to track their economic developments, often simply due to a lack of relevant, up-to-date information. However, there are certain clues that could help gauge currency movement. One example is where concern that a currency’s value looks as if it might trigger government intervention. For example, the Asian currency crisis of 1997 started when the Thai government abandoned its fixed exchange rate with the USD and allowed the Thai Baht to float.

It is also useful to keep your eyes peeled for potential economic or political upheavals. For example, Mexico forced its government to devalue the Peso in the mid-1990s. If, prior to this event, you had reasoned that devaluation was Mexico’s way out of crisis and so went short on the Peso, you would have had sweet profitable outcomes. Remember also that many of the emerging market economies are resource-rich and, therefore, their currencies are often are closely linked to the price of commodities. The Bloomberg Commodity Index dropped to its lowest level for 13 years recently, largely because of the fall in demand for commodities from China. That has had an impact on the currencies of Norway, Brazil and Russia, South African and Chile among others.

Choose to Speculate from a Diversity of Currencies

Spread betting providers can enable you to bet on a wider range of currencies. Exchange rates for the South African Rand, for example, against the GBP, USD, EUR and Chinese Yuan are available to trade on. If you do decide to speculate on one of these exotic pairs, take notice of news such as the International Monetary Fund’s World Economic Outlook report, which recently indicated a reduced level of growth in South Africa’s economy this year and next.

Bear in mind that there are some exotic currencies that are not so volatile: the four Asian tigers; Hong Kong, Singapore, Taiwan and South Korea are more predictable. The Hong Kong dollar even trades within a fixed range, which allows for even more predictability. But that means patience as the chance of quick returns is lower.

Finally, it is worth shopping around if you are looking to trade specific markets like exotic currency pairings, as certain providers may specialise in specific forex markets. 24-hour trading is also important: this benefits forex spread bettors in particular, allowing you to take advantage of events outside of a market’s usual trading hours, when other traders may be missing out.

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Peeling Away the Secrets of Orange Juice Trading

A tiny insect could be set to have a very big effect on the price of orange juice – just one of the reasons why orange juice may be an interesting commodity for you to spread bet.

The US Department of Agriculture has announced Florida’s orange crop will shrink to a 52-year low due to citrus greening, a disease spread by jumping plant lice. In the orange growing season ending in September 2016, it is predicted that production will slump by 17% to 80 million boxes – 13 million boxes lower than analysts’ prior expectations.

Like all commodities, the cost of orange juice is dependent on supply and demand. So, with yields down in the US, the world’s second largest producer of oranges, the cost of the surviving fruit will typically be higher.

A concentrated history of orange juice

So far, 100,000 orchard acres in Florida have been lost to citrus greening – and this is just one chapter in the rollercoaster story of orange juice in past decades. A volatile price performance makes this market tricky to predict, but it can be particularly interesting for spread bettors.

Before the 1947 invention of frozen concentrated orange juice (FCOJ), the industry was constantly struggling with the highly perishable nature of freshly squeezed oranges. Although FCOJ revolutionised the trade, the road since has been rocky.

Bad weather conditions in the 1980s lowered production before the 1990s saw a steady increase. However, since the turn of the century, a decline in demand can be partly attributed to competition with juices not made from concentrate as well as other fruit juices.

Weather Conditions Affecting Crop Growth

Production of oranges is led by the São Paulo region of Brazil, followed by Florida in the US. Whilst harvest is all year-round, the dependence on these two regions also means that there is particular sensitivity to their particular weather patterns. When speculating on orange juice prices, do keep a close eye on crop and weather reports – especially during Brazil’s drought season from July to November, and from December to March, when Florida is vulnerable to freezing temperatures.

Of course, other kinds of weather will have an impact as well. When hurricane Katrina hit Florida in 2005, it ruined orange groves and drove the price of frozen concentrated orange juice from 90 cents per pound to $1.98 per pound.

To highlight the volatility of orange juice prices, this post-hurricane increase happened shortly after orange juice had slumped to an all-time low of 60 cents per pound. Orange juice prices can remain static for quite long periods before sudden dramatic moves – doubling or halving quite quickly –providing scope for big spread gains.

Other Factors Affecting the Price of Orange Juice

However, weather is not the only factor influencing orange juice prices. In Brazil, FCOJ production has been hit by a citrus blight that has the potential to affect its 250 million orange trees.

There are health factors too. In the mid-1980s, ready-to-drink products began their rise to popularity. Low-carbohydrate diets and alternative juices have driven down the demand for frozen concentrated orange juice in the early 21st century.

Newly published research from the University of Reading demonstrated that drinking orange juice made drinkers more alert up to six hours after consumption. The perceived health benefits of orange juice make it likely to continue to be an important commodity.

Before You Bet…

Something to bear in mind with FCOJ is that only a handful of spread betting companies will be able to take your bets because many do not have permission from the relevant exchanges to quote prices (FCOJ is traded at the Intercontinental Exchange, formerly the New York Board of Trade).

In addition, with certain spread betting platforms, the range of markets you can bet on will depend on the type of account you have. If you have a limited-risk account with your provider, where stop losses are automatically applied to every trade, you may find you are limited to more popular commodities like gold, silver and oil.

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Driving Forces Behind Automotive Shares

If you are a keen spread bettor on company shares, you will have noticed Volkswagen (VW) shares falling by about 35% in the first two days after the recent scandal when the company admitted installing software in its diesel cars to cheat emissions tests.

Like any other company, VW’s share price reflects the future profits that investors believe it can deliver. In the face of such a scandal, demand for VW is expected to fall as potential customers choose other brands.

Volkswagen’s new chief executive Matthias Müller has said he cannot predict how the damage to the company’s reputation will hit sales. But he has also said the company will halt all but “absolutely necessary” investments so that it has enough money to pay legal and car recall costs that are expected to run into billions of euros.

Playing the Upside of a Share Price Tumble

While news like VW’s is not good news for shareholders, spread bettors, who don’t own the underlying shares, could be celebrating as a car maker’s share price tumbles – so long as they’ve gone short with their bets.

Spread betting platforms offer a huge variety of company shares to trade on. You might decide to choose companies or an industry sector in which your have some interest or knowledge. If you’re a ‘petrol head’ the automobile sector may get your motor running.

As ever, success in spread betting is about appreciating how a VW-style scandal, for example, will affect share prices and work out your trading strategy.

Safety in Sector Spreads

But here’s an idea: as an alternative to taking a punt on the share price of a single car manufacture, what about trading on the automotive sector as a whole? Many of the spread-betting providers make this possible. For example, you can trade on the FTSE 350 Automobile and Parts sector, which lists many of the larger car makers.

With sector spread betting, you win or lose depending on how a group of company shares perform. This means you are punting on broad sector trends and are exposed to less volatility than individual company shares. While a major news story can have a big effect on one company’s share price, the effect on the sector is usually diluted unless the whole industry is ‘guilty by association’.

You will still need to read the signs – good or bad – for the automobile sector and the companies within it. There are plenty of places to go for an inside track on the sector, particularly online. For example, platforms like http://news.markets spotlighted the decision by Fiat Chrysler to sell a 10% stake in Ferrari this autumn and what it might mean for the two companies’ share prices. In the event, Ferrari gained 15% on the first day after that news, while New York shares in Fiat Chrysler fell 4%.

Is the Auto Boom Over?

Many analysts have been predicting the effect of the Chinese economic slowdown on the automobile sector. Some believe the boom in the global auto sector in recent years will end in 2016, with not only Chinese but also North American markets losing steam. Chinese demand has tailed off and the prospect of a rise in US interest rates will make it harder for people to borrow money for a new car.

If you use an economic calendar it will alert you to the twice-yearly UK new car sales figures, which are a pretty good guide to car companies’ revenues. Other news to look out for is company announcements, such as in October when General Motors reported a 7.6% fall in profits compared to the same period last year. The cut in profits was put down to a huge settlement of hundreds of millions of dollars to pay for failing to recall cars with faulty ignitions.

Back to the VW fall-out, some industry observers believe that companies like the UK’s Johnson Matthey could ultimately benefit despite its shares on the FTSE 100 falling 8% when the scandal first hit. As a producer of catalytic converters for diesel cars, initial reaction was that profits would fall alongside demand for diesel cars. However, that loss could be offset by extra demand for petrol converters, which the company also makes. This may tempt some spread bettors to be more bullish on the stock.

Key Factors to Look Out For

Of course, automotive company share prices are influenced by factors common to any other kind of company: running costs will impact on the bottom line, while low inflation or interest rates mean households have greater spending power – a big factor in making the decision to buy a new family car.

Thinking longer term, take-up of new technology can also be something to watch. Reports that Apple is preparing to follow fellow tech giant Google in developing a self-driving or electric car would certainly present a challenge to the sector, affecting share price spreads.

These are all factors that can make the difference between a top-gear strategy and one that turns out to be spread bet road crash.

 

 

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Spread Betting Tips: Watch the Forecasts – and Not Just the Economic Ones

A seasoned spread bettor keeps a close eye on the weather forecast. This post focuses on El Niño, which has been shaking up the commodities markets this year, and will continue to do so for much of 2016. El Niño is caused by warmer ocean surface temperatures in Pacific Ocean, which occurs every few years. It changes climate patterns all over the world, with storms and dramatic variations in temperature causing floods in some regions and droughts in others. According to the World Meteorological Organization, this may be the strongest El Niño for decades.

So, how could this change the way you approach your spread betting strategy? Well, El Niño affects factors from crop-growing conditions to energy demands in the winter months. For example, the last ‘super’ El Niño in 1997/98 pushed up the price of a range of agricultural commodities, including cocoa, cotton, soybeans and coffee – a potential event that spread bettors may hope to capitalise on this time round.

El Niño’s Global Effects

Although some regions have yet to feel the effects of the current El Niño, its impact is beginning to spread through a number of important crop-growing regions around the world, and it is starting to drive up the prices of some commodities.

For example, Columbia’s coffee growers are hurting from the lack of rainfall this summer, having only produced half its normal annual crop. Similarly, Ghana’s cocoa farmers are blaming El Niño for poor harvests, where they are experiencing the driest period in more than three decades – adding to concerns that cocoa supplies will not meet the insatiable demand for chocolate next year. Meanwhile, sugar prices are up, thanks to diminishing yields from the world’s major producers, again caused at least in part by El Niño.

While some parts of the world experience drought during an El Niño, others get much wetter weather than usual. Flooding wreaks havoc in some regions, while in others, such as California they are desperate for rain after a record-breaking four-year dry spell.

An International Monetary Fund report published earlier this year highlights the impact of major weather events on the global economy, with most of the world enjoying higher growth in the year after an El Niño.

Do Your Homework

Every El Niño is different and the effects are erratic, varying from season to season, region to region, and commodity to commodity. Nevertheless, spread bettors would be wise to examine the pattern of commodity prices in the wake of past El Niños to help anticipate price movements in the turbulent months ahead. For example, one study shows that the negative effects tend to be worst in the summer, while in the autumn many commodities will rally and rebound.

The current El Niño is going to have big implications for commodity futures so it will be vital to take it into account when deciding on your spread betting strategy. But, as always, there are many other variables at work and it is important to consider the whole agricultural cycle. Just because the harvest is bad in one region because of El Niño, it is important to remember that it may be balanced out by a good harvest somewhere else.

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In or Out: How Will the EU Vote Shape the Markets?

The EU referendum battle has now kicked off, with campaign groups from both sides starting to set out their stalls. The date of the referendum has not yet been set, but David Cameron has reported it to be before the end of 2017. The clock is ticking – not just for the UK, but also for spread bettors looking to capitalise on market uncertainty surrounding the vote.

Ahead of the referendum, the Prime Minister is trying to renegotiate the UK’s relationship with Europe. So far, there is little detail about the Government’s demands, but Cameron has recently agreed to write to Donald Tusk, president of the European Council, setting them out by the end of November this year.

Typically, whenever the EU referendum hits the headlines, a reaction follows in the shares, indices, commodities and forex market. As with a General Election, most spread betting platforms enable you to speculate on the overall referendum result. However, serious financial spread bettors will pay particular attention to its impact on the markets, adapting their spread strategies as the debate unfolds.

Taking Sides

Broadly speaking, eurosceptics believe that a ‘Brexit’ would unshackle the UK from EU rules and regulations, allowing the UK to become a stronger trading nation on its own terms, as well as relieving Britain from the economic burden of immigration. Meanwhile, europhiles argue that going solo would lead to deep economic uncertainty and the potential loss of millions of jobs as the UK would lose its most important market (the EU), as well as other markets around the world that have trade agreements with the EU.

Many pundits think the most likely outcome is somewhere in-between these two opposing views, but much depends on what the Government could negotiate once outside the EU.

In practical terms, if the UK does vote to withdraw from the EU, it will be allowed to leave two years after notifying the European Council of its intention to do so. However, in all likelihood, it would take much longer to negotiate and agree the terms of the UK’s on-going relationship with Europe and wind up EU membership.

Referendum Timeline

May and September are generally the most likely times of year for a referendum. Devolved parliament elections in Scotland, Northern Ireland and Wales, and the election for the London Mayor are being held on 5th May 2016. Although this has been ruled out as a date for the EU referendum, it is possible that it could still take place near then.
The Government wants to bring its EU negotiations to a close by next summer or by the end of 2016 at the latest. Therefore late 2016 or early 2017 are thought to be the most likely time for the referendum.
The French presidential election takes place in May 2017 and Cameron will certainly want to have his EU negotiations well wrapped up by then to avoid them being trampled on by French politicians taking a stand against UK demands for reform. German elections then take place in September 2017. This is thought to be the latest date the referendum could be held, as the Government is likely to avoid risking a poor turnout in the winter.

How Could this Benefit My Spread Betting Strategy?

Whatever the outcome, the strength of the pound will fluctuate during the run-up to the referendum and its aftermath, especially around key announcements and events. Which way the sterling will move in relation to other currencies, and by how much, is of course the big question for foreign exchange market watchers, but a savvy spread betting strategy will need to flag up the key dates.

As with any economic event of this magnitude, it is possible for most markets to be affected in some way, but one major area of opportunity to pay particular attention to is stocks and indices. The share prices of multinationals and European companies with a strong UK presence, and vice versa, may fluctuate significantly in the run-up to the referendum, especially as major Brexit policies or trade agreements are announced.

Spread bettors will not only be thinking about the repercussions of the eventual referendum result on markets, but anticipating the impact of key announcements and meetings in Brussels along the way. This topic is going to dominate politics for the foreseeable future and following its developments will help spread bettors to reap the rewards.

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What’s the deal with oil?

Oil is the world’s most heavily traded commodity and also one of the most popular spread betting markets. The price of crude oil has the narrowest spread of all commodities, but is temperamental and therefore ideally suited to spread bettors, as long as they keep on top of the latest developments affecting demand and supply.

Buyers and sellers of oil include speculators, funds and investors, as well as oil producers and refiners who use oil futures to hedge their exposure to price changes by fixing them long in advance.

Taking a long-term perspective, the price of oil might be expected to follow an upward trend as it gets harder to find, despite the discovery of new reserves and new techniques for extracting oil, such as the tar sands. However, the price of crude oil can go fluctuate rapidly and there are great opportunities for profit by betting on short-term price fluctuations.

Know your index

Two different oil products set the benchmark for the oil industry – Brent Crude and West Texas Intermediate (WTI). Although they are both traded in US dollars, they each have different prices and as such, supply and demand dynamics will affect them differently. Factors that affect Brent will not necessarily have the same impact on WTI, so it’s important to know which one you are spread betting on.

Oil futures are usually traded in lots of 1,000 barrels (equivalent to 42,000 gallons) on the New York Mercantile Exchange (NYMEX), the Intercontinental Exchange (ICE) in London, as well as the Shanghai Futures Exchange (SHFE) and the Tokyo Commodities Exchanges (TOCOM). Prices are quoted in dollars and cents, so for spread betting purposes a point is the same as a one cent change in price.

Key drivers of the oil market

Many factors influence the supply of and demand for oil and therefore dictate its price. Some are predictable and others can come out of the blue.

Geopolitical events have a major influence on the price of oil. Conflicts and uprisings in the Middle East, for example, where much of the world’s oil is produced, have a big effect on the price. Severe weather conditions such as hurricane season can also affect the oil supply and therefore, the price of oil.

Then there’s OPEC (the Organisation of Petroleum Exporting Countries), the 12-member cartel of oil-producing countries, which decides how much oil they will export over a certain period. Forecasts from OPEC ministers on predicted oil output will move prices, as will statements from the IEA (International Energy Agency). So it’s important that spread bettors on oil listen out for these announcements and understand the potential impact.

An important indicator of the oil market is the US inventory level, issued every week by the American Petroleum Institute, which indicates how much crude oil is available. Generally speaking, if inventory levels have fallen compared to the previous week, this can suggest a possible upcoming supply shortage, which may cause the oil price to go up. By contrast, if there’s a glut of oil, the price can reasonably be expected to fall.

However, there are many other influences on oil prices, such as the stock of refined oil, or gasoline that the US is carrying. If governments decide to release emergency reserves of oil, this will clearly also impact prices.

It’s also worth paying attention to forex rates. As oil is traded in US dollars, the price of oil often follows the dollar exchange rate. So if the dollar appreciates in value against, say, the euro or sterling, then the price of crude may go down, and vice versa.

Current volatility

Oil prices have been particularly volatile over the last year and may stay low for some time. For example, Brent Crude reached a high of US$114 a barrel in June 2014 but dropped to below US$50 in October this year.

Brent crude oil. Source: Thomson Reuters

Global oil demand growth is predicted to slow in 2016 from a five-year high in 2015, according to the IEA’s October market report. It says global demand growth is expected to slow from its high of 1.8 million barrels per day in 2015, to 1.2 million barrels per day in 2016. Despite this, OPEC continues to pump oil at record levels – often more than 30 million barrels per day.

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ThinkForex UK offers extra £1m insurance protection, launches spread betting on MT4

Since obtaining its FCA license, ThinkForex has been steadily building its operations in the UK. On Friday the broker announced it was beefing up protection for investors by offering an additional £1m insurance protection.

Whereas most brokers regulated by the Financial Conduct Authority (FCA) offer the industry-standard Financial Services Compensation Scheme (FSCS) coverage of £50,000, ThinkForex has launched an extra £1m insurance protection per client, underwritten by QBE Underwriting Limited and other participating syndicates at Lloyd’s of London.

In addition, to provide its UK clientele with a more localised offering, ThinkForex has just released their new spread betting offering on the MetaTrader 4 (MT4) trading platform.

ThinkForex has hired a strong, industry-experienced team in their new London office, which will service clients across Europe, the Middle East, Asia, and Latin America.

Read the full article here: https://leaprate.com/2015/10/thinkforex-uk-offers-extra-1m-insurance-protection-launches-spread-betting-on-mt4/

Related reading: http://robertsweetman.com/2015/08/13/discipline-whats-the-secret/