If you are interested in spread betting on the US dollar versus the Canadian dollar, or USD/CAD, then there are some principles that you need to bear in mind. The economies are closely linked, with a long common border, but some aspects are very different. The Canadian economy is generally dynamic and healthy, whereas the USA economy tends to be consumption oriented, and deficit driven.
One of the basic economic facts about trade between these countries is that Canada has a great many natural resources which are exported to the USA. This has several effects. Firstly, the rate of exchange with the US dollar and other countries is very important to Canada, as it directly impacts on the income it achieves with its exports. Canadian resources are particularly important to the USA, even though there are countries such as Russia and others which have equally rich assets. Canada is a free-market, with little government control, and many others are subject to interference. Couple this with the adjacency to the US markets, and you can see that this relationship is key.
The value of Canada’s exports is related not just to the currency exchange rate but also to the commodity markets, given the amount of resources available. Canada has large quantities of commodities such as natural gas, oil, and timber. The majority of Canada’s exports are taken by the US, therefore any downturn in the US economy reflects poorly on Canada’s wealth. The US is much more important to Canada than Canada is to the US, and Canada is far more likely to be troubled by currency exchange rate changes than the American economy. The Royal Bank of Canada to a limited extent tries to control the exchange rate through the indirect tools of interest rates and ease of credit.
In all its dealings, Canada has its roots in the British Empire, and has a different way of operating than its neighbour on the North American continent. Though the role of the monarchy is sometimes belittled by Federalists, it still plays a major role in the approach of the Canadians to the world.
What can be said of the US economy? Undoubtedly, it has suffered major setbacks in the recent years of the global economic crisis, but it is rooted in the US dollar which is recognized as the most important currency in the world. Despite the abandonment of the gold standard several decades ago, when a country was no longer required to have gold reserves to back up the money issued, the US economy has continued to grow on the basis of fiat currency, printed on-demand, and for the time being at least the international standard and reserve currency.
Spread betting on the USA dollar versus the Canadian dollar, or “Loonie” as it is known, is a medium risk activity, with moderate volatility evident on the charts. If the global economy as a whole is looking good, then this tends to favour the value of the Canadian dollar because of the large quantity of natural resources which benefit from buoyant commodity prices.
Spread Betting on the USD/CAD Rolling Daily
The US dollar and Canadian dollar are always fluctuating around parity, and at the moment the quotation for the daily spread bet is 10,115.0 – 10,117.5, meaning that the US dollar is worth just over one Canadian dollar. If you think the US dollar is going to strengthen in the relationship, you would want to go long on this pair, buying at a price of 10,117.5, and you might choose your stake to be £7.50 per point. Because this is a rolling daily bet, which is automatically rolled over every night to the following day, there may be a small interest charge made daily, but this is usually not significant if you are trading in the short term.
Assume that the value of the US dollar does rise, you may be looking to close your bet and take your winnings when the price gets to 10,351.2 – 10,353.7. It is straightforward to work out how much you have won with spread betting: –
- Your long spreadbet was placed at 10,117.5
- Your bet closed at 10,351.2
- The number of points you have gained is 10,351.2-10,117.5
- You have won a total of 233.7 points
- At a stake of £7.50 per point, your winnings are £1752.75
Should the spreadbet have gone against you, you must be prepared to close it and cut your losses quickly. Say the price dropped to 10,072.1 – 10,074.6. In this case, you must work out how much you lost: –
- Your long spreadbet was placed at 10,117.5
- Your bet closed at 10,072.1
- The number of points you have lost is 10,117.5 – 10072.1
- You have lost a total of 45.4 points
- At a stake of £7.50 per point, your losses are £340.50
Suppose instead that you believed the US dollar was going to weaken, or looked at another way that the Canadian dollar would strengthen, then you would want to place a sell or short bet on this currency pair. This time you stake £4.50 per point that the price will go down. Because it is a short bet, the opening price is 10,115.0.
This time we assume that the price drops to 9963.2 – 9965.7, and you decide to take your profit. The amount that you gained is worked out like this: –
- The short spreadbet was placed at 10,115.0
- The bet was closed at 9965.7
- The difference in points is 10,115.0 less 9965.7
- This is 149.3 points
- You staked £4.50 per point
- Multiplying together, you have won £671.85
You will find that you frequently lose on your bets, no matter how good your research and analysis, and you need to close a losing bet quickly to minimize your losses. Assume in this case the price went up to 10,146.7 – 10,149.2, a losing move for your short bet, and you decide to close the bet at this level.
- The short spreadbet was placed at 10,115.0
- The bet was closed at 10,149.2
- The difference in points is 10,149.2 less 10,115.0
- This is 34.2 points
- You staked £4.50 per point
- Multiplying together, you lost £153.90
Spread Betting on the USD/CAD Future
The USD / CAD Forex pair is popular with traders from the Middle East, and is a reasonably volatile but manageable currency pair to trade. The current price for a futures based contract expiring in a few months is 10,141.3 – 10,148.8. Assuming you think that the Canadian dollar is going to strengthen against the US dollar, you would want to place a sell bet on this currency pair. You can choose the amount of stake, and it is typically a minimum of £.50 with many spread betting providers. In this case assume you stake £5.50 per point.
If all goes according to your plan, then the price will fall, and you may want to close your bet and take your winnings when it reaches 9958.6 – 9966.1. If you do, then you can work out how much you won like this: –
- Your bet was placed at the selling price of 10,141.3
- Your bet closed at the buying price of 9966.1
- Therefore you gained 10,141.3-9966.1 points
- That works out to 175.2 points
- Your stake was £5.50 per point
- So you won 175.2 times £5.50
- Your total winnings are £963.60
Sometimes your bet will not win, and you must be quick to close your bet once you realize it has failed, so that you can keep your losses to a minimum. Say the price went up to 10,187.7 – 10,195.2, you realized it wasn’t going to work, and you closed the bet.
- Your bet was placed at the selling price of 10,141.3
- Your bet closed at the buying price of 10,195.2
- Therefore you lost 10,195.2-10,141.3 points
- That works out to 53.9 points
- Your stake was £5.50 per point
- So you lost 53.9 times £5.50
- Your total loss was £296.45
If instead you favoured the USA dollar over the Canadian one, you might have taken a long bet for £7.50 per point when the price was 10,141.3 – 10,148.8. Over the next few weeks, the spread bet quote rose to 10,362.4 – 10,369.9, and you closed your bet for a win.
- Your bet was placed at the buying price of 10,148.8
- And it closed at the selling price of 10,362.4
- The number of points you gained was 10,362.4 less 10,148.8
- So you made 213.6 points
- With a stake of £7.50 per point, you have gained a total of £1602
if you were not so lucky, the price might have gone down instead, and as soon as it got under 10,100 you might decide that you must cut your losses. You close your bet when the quote was 10,091.7 – 10,099.2. It is simple to work out how much you lost.
- Your bet was placed at the buying price of 10,148.8
- And it closed at the selling price of 10,091.7
- The number of points you lost was 10,148.8 less 10,091.7
- That amounts to 57.1 points
- With a stake of £7.50 per point, you lost a total of £428.25