Ordinary investors are making money from the plummeting pound — by betting
that it will continue its slide. Spread betting and fixed-odds bookmakers
have seen a surge in people betting against the pound — and reaping handsome
rewards.
Sterling fell to €1.11 last Friday — its lowest level since the euro was
launched in 1999 — sparking warnings that it could soon achieve parity.
Against the dollar, the pound ended the day at $1.49, a far cry from the $2.12
it reached in November last year.
Here, we look at what the future holds for the pound, and explain how to trade.
HOW LOW WILL IT GO?
The pound looked dangerously close to parity with the euro last week as fears
mounted that the UK would be hardest hit by the world recession. At Luton
airport, ¤1.04 was offered for £1, while those changing £200 at Birmingham
received €199 after charges.
Rupert Lee-Browne at Caxton FX, a broker, predicted that the pound could fall
to €1 by the end of next year.
Mike Chadney of Cityodds.com , a
fixed-odds bookmaker, said the election of Barack Obama was providing
support for the dollar, but added: “The pound’s already fallen a long way
and could snap back.”
Andy Yates at financial data firm Digitallook.com, said: “The past six months
have been littered with gloomy economic data, but the currency markets are
notoriously unpredictable and at the moment they’re even more volatile than
normal.”
Jeremy Cook at World First, a currency broker, expects the pound to strengthen
to $1.66 in six months and $1.73 by this time next year. Against the euro,
he foresees a lesser rally, to €1.23 next summer and €1.28 in 12 months.
Those who call the direction of currency markets right can make tidy profits.
Here are some of the options:
SPREAD-BETTING
One of the easiest ways to profit from exchange-rate movements is to sell
sterling and buy strengthening currencies. Forex trading has opened this up
to retail investors.
Spread-betting allows investors to “short” the market and speculate that a
currency will continue to fall — or rise — against another currency. Gains
are made from betting on the right direction.
Digital Look said 72.5% of all short positions taken by private investors last
week were bets against sterling — that makes it by far the most popular area
of the market.
“Private investors normally favour company shares for short-selling, but this
has shifted to sterling,” said Yates. “Private investors have had a very
tough time over the past year so it is interesting that they have been
making some decent profits from the slide in the pound.”
Spread-betting firms quote a spread on a given currency. For example, Capital
Spreads last week gave a spread on the pound against the euro of
€1.1232-€1.1235. You could “buy” at the upper end — if you think the pound
will strengthen — or “sell” at the lower end if you think it will weaken.
Say you bought at ¤1.1235, on a £1 a point movement bet, and the pound
strengthened until the spread being quoted was €1.1315-€1.1318. You could
then close your position by selling at €1.1315. This would give you an £80
profit (€1.1315 minus €1.1235 equals 80 points, multiplied by your £1 a
point stake). However, if the market went in the other direction, you would
lose in equal proportion.
BINARY BETTING
Binary betting allows you to take a view on whether or not an event will
happen — that the pound will slide on a given day, or the FTSE 100 index
will close down.
There are only two outcomes in a binary bet — the event either happens or it
doesn’t. In this regard, it is similar to betting on horses or a football
match.
With a binary bet, your potential loss is fixed at the amount you wager, and
potential profit is also fixed, based on the odds that are given when you
place your bet.
This contrasts with spread betting: here, profits and losses are open-ended,
although you can place a “stop-loss” on your trade — the level at which it
will close to limit losses.
City Odds has seen a 50% jump in users of its trading platform in the past
three months. Around a third of trades are on the pound versus the dollar.
You can also bet on the euro against the dollar, and the company, launched a
year ago, plans to introduce pound versus euro trades in the new year.
Betters set their own parameters within which they think a certain market — a
currency market, stock market or commodity, like gold or oil — will close on
a given day. Typically, odds are about three to one.
The tighter the range, the better the odds, and the higher your potential
return.The average bet is about £10, but can range from £5 to £100.
Last Thursday you could get odds of eight to one that the pound would close at
between $1.4970 and $1.5180. On a £100 bet, you would have won £817.18 if it
closed at this level.
It ended at $1.4950 when the London market closed at 5pm. This is the point at
which City Odds’ bets close, although currency markets are generally open
round the clock.
If it looks as though the bet is going against you — or if you want to take
profits — you can “sell” your bet back to City Odds during the day.
If the currency value moves farther away from your range, the price that City
Odds will give you for your bet drops to, say, £25 on a £100 bet. If,
however, it looks like you might win, but it’s not a certainty, you could
sell a £100 bet for £150. This means you’ll still turn a profit — though not
as much as if you had you waited until the end of the trading day and you
were within the range you set.
BUYING CURRENCY
You can also directly trade one currency against another, buying those
currencies that you think will strengthen and selling ones you expect to
weaken.
Betsy Waters at dbFX.com, Deutsche Bank’s
online retail currency-trading platform, said: “Retail foreign exchange has
come of age in the financial crisis. Forex as an asset class has been proved
to be uncorrelated to equity and bond markets so it’s not surprising that
more investors are looking to currency as a means of generating returns.”
The platform has seen an 118% increase in trading volumes in the year to the
end of November compared with the same period last year.
GO TO THE BOOKIES
Bookmaker William Hill last week opened a book on when the government will
announce that the pound is to be abolished and replaced by the euro. It is
offering odds of 20-1 that it will happen next year.
“There seems to be an inevitability about the euro replacing the pound
eventually, but the big question is when a government will have the nerve to
do it,” said spokesman Graham Sharpe.
Odds are at 14-1 for 2010, 10-1 for 2011 and 2-7 for 2014 or later.
Cut the pain
The weakness of the pound will hit expats earning in pounds and European
holidaymakers alike. For pensioners and others on fixed sterling incomes,
the effects will be even more pronounced. Fortunately, there are ways to
reduce the pain.
Pensioner living on the Continent
Older Britons living in Europe but drawing their pension in pounds could well
be wishing they had fixed the exchange rate in January last year, having
seen their euro income slashed by close to a third in the past two years.
Fixing at €1.12 to £1 is much less tempting, but it will provide certainty and
could prove a good move if euro sterling parity becomes a reality.
If you believe the sterling to euro rate will continue to fall, you can pay a
deposit of about 10% to fix the rate you receive through forex firms such as
Moneycorp for up to two years.
If you are an expat
Expats hit by the falling pound can take the same steps to shelter from
currency fluctuations, but this will depend on whether they expect the euro
to keep gaining ground.
Forex specialists and currency traders are currently putting the rate at the
end of next year between €1 and €1.3, according to research from adviser
Hargreaves Lansdown. But nobody really knows what is going to happen, so
optimists may prefer to wait and see.
If you are buying a property
Anyone with a large future commitment in euros would probably be sensible to
fix the exchange rate for that transaction now to prevent any problems
raising extra funds should the rate worsen.
If you are a second homeowner
Anecdotal evidence suggests that a number of Brits with second homes in Europe
are cashing in on the weak pound by selling up — and changing the proceeds
of the sale back to pounds at a record rate.
However, many European countries are undergoing housing market busts, so any
currency gains could be wiped out.
If you are concerned about meeting mortgage repayments, it may also be worth
setting an advance monthly exchange rate. You could hedge your bets by
fixing a rate for this amount only, and take your chances with spending
money.
If you are a holidaymaker
Britons planning a European skiing holiday could similarly buy half their
euros at today’s rates to limit the pain should sterling fall even further.
