Spot rates are the current exchange rates at which specific currencies can be bought or sold on currency exchange markets. Spot rates fluctuate by the second. At Currency Hedger, a single transfer may also be called a ‘spot deal’. All that means is that you have confirmed your transfer at a certain exchange rate.
Spot rates are the current exchange rates at which specific currencies can be bought or sold on currency exchange markets. In plain English, they are the “right now” rate for any given currency. If you choose to make an exchange immediately, your chosen currencies will be exchanged at the current spot rate.
Foreign exchanges executed under the spot rate must be delivered within two business days. They are no-nonsense, simple transactions, and most currency exchanges are executed at the spot rate.
Spot rates are beneficial because they take the guesswork out of currency exchange, and allow for a bit more operational security in the short term. If you are absolutely positive you are comfortable with the spot rate, you can proceed with your transaction immediately with confidence. This is great for people who want to pay for foreign goods, pay foreign contractors, or need and can afford last-second currency exchanges. Running up against a deadline for that invoice? Go ahead and send it at the spot rate; you know what you’re getting.
But what if you aren’t comfortable with exchanging currencies immediately? Perhaps you have a lucrative deal on the horizon in India, but you aren’t ready to make a payment yet, and you’re concerned the exchange rate will only get worse later in the season? Then forward rates may be perfect for you.
Forward rates allow you to lock-in the current exchange rate for a transaction to be completed at an agreed-upon later date. These contracts are binding, but they can be massively advantageous to certain customers.
Take the India deal mentioned above. There are uncontrollable factors that may affect your exchange rate such as:
political instability or
Any number of variables could cause the exchange rate to be more costly at the time you’re ready to actually send the money. With a Forward Contact, you can guarantee an exchange rate now for use even at a later date. At Currency Hedger, we offer forwards from two days to twelve months in advance.
If you’re ready to make a foreign currency exchange right now, you should know that banks charge excessive margins on the daily exchange rate. Currency Hedger gives you a better deal, planing and simple. Log in to Currency Hedge check the current up-to-date spot rates, and voila! You’re off to a world of global financial freedom
A contract for difference (CFD) is a popular form of derivative trading. CFD trading enables you to speculate on the rising or falling prices of fast-moving global financial markets (or instruments) such as shares, indices, commodities, currencies and treasuries.
Some of the benefits of CFD trading are that you can trade on margin, and you can go short (sell) if you think prices will go down or go long (buy) if you think prices will rise. CFDs are tax efficient in the UK, meaning there is no stamp duty to pay*. You can also use CFD trades to hedge an existing physical portfolio.
With CFD trading, you don’t buy or sell the underlying asset (for example a physical share, currency pair or commodity). You buy or sell a number of units for a particular instrument depending on whether you think prices will go up or down. We offer CFDs on a wide range of global markets and our CFD instruments includes shares, treasuries, currency pairs, commodities and stock indices such as the UK 100, which aggregates the price movements of all the stocks listed on the FTSE 100.
For every point the price of the instrument moves in your favour, you gain multiples of the number of CFD units you have bought or sold. For every point the price moves against you, you will make a loss. Please remember that losses can exceed your deposits.
CFDs are a leveraged product, which means that you only need to deposit a small percentage of the full value of the trade in order to open a position. This is called ‘trading on margin’ (or margin requirement). While trading on margin allows you to magnify your returns, your losses will also be magnified as they are based on the full value of the CFD position, meaning you could lose more than any capital deposited.
Spread: When trading CFDs you must pay the spread, which is the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price. The narrower the spread, the less the price needs to move in your favour before you start to make a profit, or if the price moves against you, a loss. We offer consistently competitive spreads.
Holding costs: at the end of each trading day (at 5pm New York time), any positions open in your account may be subject to a charge called a ‘holding cost’. The holding cost can be positive or negative depending on the direction of your position and the applicable holding rate.
Market data fees: to trade or view our price data for share CFDs, you must activate the relevant market data subscription for which a fee will be charged. View our market data fees
Commission (only applicable for shares): you must also pay a separate commission charge when you trade share CFDs. Commission on UK-based shares on our CFD platform starts from 0.10% of the full exposure of the position, and there is a minimum commission charge of £9. View the examples below to see how to calculate commissions on share CFDs.
Please note: CFD trades incur a commission charge when the trade is opened as well as when it is closed. The above calculation can be applied for a closing trade; the only difference is that you use the exit price rather than the entry price.
When you trade CFDs with us, you can take a position on over 10,000 CFD instruments. Our spreads start from 0.7 points on forex pairs including EUR/USD and AUD/USD. You can also trade the UK 100 and Germany 30 from 1 point and Gold from 0.3 points.
See Our Traded Instruments
Buying a company share in a rising market (going long)
In this example, UK Company ABC is trading at 98 / 100 (where 98pence is the sell price and 100penceis the buy price). The spread is 2.
You think the company’s price is going to go up so you decide to open a long position by buying 10,000 CFDs, or ‘units’ at 100 pence. A separate commission charge of £10 would be applied when you open the trade, as 0.10% of the trade size is £10 (10,000 units x 100p = £10,000 x 0.10%).
Company ABC has a margin rate of 3%, which means you only have to deposit 3% of the total value of the trade as position margin. Therefore, in this example your position margin will be £300 (10,000 units x 100p = £10,000 x 3%).
Remember that if the price moves against you, it’s possible to lose more than your margin of £300, as losses will be based on the full value of the position.
Outcome A: a profitable trade
Let’s assume your prediction was correct and the price rises over the next week to 110 / 112. You decide to close your buy trade by selling at 110 pence (the current sell price). Remember, commission is charged when you exit a trade too, so a charge of £11 would be applied when you close the trade, as 0.10% of the trade size is £11 (10,000 units x 110p = £11,000 x 0.10%).
The price has moved 10 pence in your favour, from 100 pence (the initial buy price or opening price) to 110 pence (the current sell price or closing price). Multiply this by the number of units you bought (10,000) to calculate your profit of £1000, then subtract the total commission charge (£10 at entry + £11 at exit = £21) which results in a total profit of £979.
Outcome B: a losing trade
Unfortunately, your prediction was wrong and the price of Company ABC drops over the next week to 93 / 95. You think the price is likely to continue dropping so, to limit your losses, you decide to sell at 93 pence (the current sell price) to close the trade. As commission is charged when you exit a trade too, a charge of £9.30 would apply, as 0.10% of the trade size is £9.30 (10,000 units x 93p = £9,300 x 0.10%).
The price has moved 7 pence against you, from 100 pence (the initial buy price) to 93 pence (the current sell price). Multiply this by the number of units you bought (10,000) to calculate your loss of £700, plus the total commission charge (£10 at entry + £9.30 at exit = £19.30) which results in a total loss of£719.30.
CFD trading enables you to sell (short) an instrument if you believe it will fall in value, with the aim of profiting from the predicted downward price move. If your prediction turns out to be correct, you can buy the instrument back at a lower price to make a profit. If you are incorrect and the value rises, you will make a loss. This loss can exceed your deposits.
If you have already invested in an existing portfolio of physical shares with another broker and you think they may lose some of their value over the short term, you can hedge your physical shares using CFDs. By short selling the same shares as CFDs, you can try and make a profit from the short-term downtrend to offset any loss from your existing portfolio.
For example, say you hold £5000 worth of physical ABC Corp shares in your portfolio; you could hold a short position or short sell the equivalent value of ABC Corp with CFDs. Then, if ABC Corp’s share price falls in the underlying market, the loss in value of your physical share portfolio could potentially be offset by the profit made on your short selling CFD trade. You could then close out your CFD trade to secure your profit as the short-term downtrend comes to an end and the value of your physical shares starts to rise again.
Using CFDs to hedge physical share portfolios is a popular strategy for many investors, especially in volatile markets.
Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
Currency Hedger is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Currency Hedger or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
These releases typically give an insight into a particular country’s economic health and can have wider ramifications if the data is from a major economy, such as the US or eurozone. These important figures are seen as statistical evidence to back up views on whether or not a region is doing well.
Most global economic data releases are similar across the major world economies but, for the benefit of example, the US and its currency will be used. Typically, these releases are closely followed by those who look to trade foreign exchange, but be aware that these releases also affect global stocks, commodities and treasuries.
A major point to be aware of is that the biggest moves in the market usually occur if the figures come out majorly against general consensus. Most economic data is preceded by economists and investment banks expressing a view on what they think these figures might be like, and publishing these views or expectations in advance. It can make for an exciting ride if, or when, the ‘experts’ get it wrong.
To get started, let’s look at major US statistics that influence the foreign exchange markets directly.
Released (at 1.30pm GMT) about 40 days after the month’s end
This statistic is the difference between US exports and imports of goods and services, such as cars, electronics, textiles, banking and insurance. A positive balance is known as a trade surplus and this occurs if there are more exports than imports of the above goods and services. A negative balance is referred to as a trade deficit or, informally, borrowed prosperity, living beyond a nation’s means, or a trade gap. Export demand and currency demand are directly linked because foreigners must buy the domestic currency to pay for the nation’s exports. Export demand also impacts production and prices at domestic manufacturers. The implications over the long term of a deteriorating trade balance is to put downward pressure on the dollar.
Released monthly (at 1.30pm GMT), about 15 days after the month ends
This is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. The CPI is commonly considered the best monthly measure of inflation for the US economy. Food and energy prices account for about a quarter of CPI, but they tend to be very volatile and distort the underlying trend. The FOMC (Federal Open Market Committee) usually pays the most attention to ‘core’ data (which excludes food and energy from the CPI figure), and so do traders. A rapid increase in the value of the CPI figures can give way to inflationary fears as rising prices could lead the central bank to respond by raising interest rates. Raising rates generally leads to less disposable income, reducing spending and thus decreasing inflationary pressure. An increase in interest rates usually increases the value of a nation’s currency, but it can negatively impact the stock market in the short term. This is because some investors may decide to hold money in deposit as cash to earn interest rather than investing in the market, which is seen to be more risky
Released monthly (at 1.30pm GMT), about 17 days after the month ends
This index measures the change in price of factory produced goods. Analysts focus on ‘core’ PPI inflation — the rate of change in finished goods’ prices, excluding food and energy prices (as these tend to add too much volatility to the figures). The PPI is a goods-only index and does not include the cost of transportation, wholesaling and retailing. It does not measure costs in the service sector. PPI tends to have more impact when it’s released ahead of CPI data because the reports are significantly correlated. It’s a leading indicator of consumer inflation – when producers charge more for goods and services the higher costs are usually passed on to the consumer. A rapid rise in PPI is considered inflationary and can depress bond prices and increase long-term interest rates. The impact on the US dollar and stocks is not usually clear and has to be read in conjunction with other economic data releases.
Released monthly (at 1.30pm GMT), usually on the first Friday after the month ends
This is a monthly survey statistic of nationwide non-farm payroll employment across the US and is one of the most important and closely watched economic releases in the world. It is intended to represent the total number of paid US workers of any business, excluding:
- General government employees
- Private household employees
- Employees of non-profit organisations that provide assistance to individuals
- Farm employees
The total non-farm payrolls account for approximately 80% of the workers who produce the entire gross domestic product of the United States. Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity. The non-farm payrolls statistic is used by government policy makers and economists to determine the current state of the economy, and predict future levels of economic activity. If employment is strong, interest rates and the US dollar will normally rise. If the figures are weak then interest rates and the dollar will usually fall. A strong payrolls figure can provide the stock markets with a boost if it signals a recovery in the economy. Make sure to note this date in your diaries each month.
Released weekly (at 1.30pm GMT), five days after the week ends
This is the number of individuals who filed for unemployment insurance for the first time during the past week. This is the US’s earliest economic data. Market impact fluctuates from week to week and there tends to be more focus on the release when traders need to diagnose recent developments, or when the reading is extreme. Although it’s generally viewed as a lagging indicator (it comes out five days after the week ends), the number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labour-market conditions. If unemployment claims increase, you might expect the stock market and US dollar to fall in value.
Released quarterly (at 1.30pm GMT), about 30 days after the quarter ends
The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country’s economy. It represents the total dollar value of all goods and services produced over a specific time period – you can think of it as the ‘size’ of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.
As one can imagine, economic production and growth (what GDP represents) have a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labour to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market and that nation’s currency. If the US came out with a positive GDP figure it would be expected that the US dollar would rise as the economy strengthens.
Released monthly (at 1.30pm GMT), about 14 days after the month ends
This figure represents the total of durable and non-durable goods sales to consumers. Services are largely excluded from this statistic. The retail sales figure have additional relevance during the Christmas period as this sector makes a large percentage of its total yearly revenue at this time. Monthly changes are often erratic and the data is subject to later large revisions. Despite this, the implications of strong retail sales can be good news for stocks and the US dollar and vice versa
Released monthly (at 2.15pm GMT), about 16 days after the month ends
This economic report measures changes in output for the industrial sector of an economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of GDP (gross domestic product), they are highly sensitive to interest rates and consumer demand. This makes industrial production an important tool for forecasting future GDP and economic performance. Industrial production figures are also used by central banks to measure inflation, as high levels of industrial production can lead to uncontrolled levels of consumption and rapid inflation. An acceleration of growth in industrial production is, in the first instance, positive for the US dollar and can put pressure on interest rates to rise.
Released monthly (at 3pm GMT) on the first business day after the month ends
The PMI is an index based on a survey of corporate purchasing managers (from construction, services and manufacturing) on the state of the industry as they see it. PMI is a very important sentiment reading, not only for manufacturing, but also for the economy as a whole. Although US manufacturing is not the huge component of total gross domestic product (GDP) that it once was, this industry is still where recessions tend to begin and end. For this reason, the PMI is very closely watched, often setting the tone for the upcoming month and other indicator releases.
The magic number for the PMI is 50. A reading of 50 or higher generally indicates that the industry is expanding. If manufacturing is expanding, the general economy should be doing likewise. As such, it is considered a good indicator of future GDP levels. Many economists will adjust their GDP estimates after reading the PMI report. Another useful figure to remember is 42. An index level higher than 42%, over time (months and years), is considered the benchmark for economic (GDP) expansion. The different levels between 42 and 50 speak to the strength of that expansion. If the number falls below 42%, recession could be just around the corner. The index is designed so that a reading above 50 means that purchasing managers expect manufacturing conditions to improve. PMI readings should rise as the pace of spending remains healthy. Accelerating manufacturing output will strain capacity, pushing producer price inflation higher. If the PMI is well above 50, interest rates and the dollar may rise.
There are a lot of other minor statistics in addition to the ones mentioned above. These are released on an ongoing basis and serve to further reinforce the overall statistical picture of the US (and for that matter, any other) economy at any particular point in time.
In practical terms, other major economies, like the UK, Japan and Germany, have their own versions of similar ‘major’ and ‘minor’ statistics. The Japanese Tankan report of Japanese investing intentions is an example. These statistics are used to paint that country’s own fundamental economic picture and serve as the basis for currency and international comparisons.
Remember to take note of these important data releases, as they can have a large impact on your current open positions and give further insight as to the real state of the economy you are monitoring.