Hey buddy, need a dollar?

As people wake up to the attraction of currency trading with their own account, Elizabeth Pfeuti looks at the most cost-efficient ways of accessing the market

For most, “foreign exchange” conjures up thoughts of summer holidays, travellers’ cheques and working out if an ice-cream costs more at home. However, a growing number of us have discovered that currency can also be a way to make sure of a whole lot more than the occasional knicker bocker glory.

Currency trading has become big business for retail investment platforms and this trend shows little sign of abating. Just last month, a net £14 billion flowed into the 58 Europe-listed exchange-traded currency funds measured in a universe monitored by data monitor Morningstar.

Paul Dimambro, head of Hargreaves Lansdown Currency Service, says: “There are a variety of different ways for retail investors to trade currencies, including contracts for difference, spreadbetting and exchange traded funds (ETFs).

“There has been a large increase over the past decade as investor needs have become more sophisticated and currencies have dominated the financial headlines. Currency pairs which have been of particular interest to UK private investors include sterling versus the euro and US dollar, and the euro versus the US dollar. The Australian dollar, yen and Swiss franc have become increasingly popular to trade over the past few years.”

Investor needs have become more sophisticated and currencies have dominated the financial headlines

As far as currency is concerned, it seems ETFs are no longer the main story. “There has been limited activity in the currency ETF space owing to lack of exposure, awareness and understanding of the products,” Mr Dimambro explains.

Investors have been taking a bet that one country’s economic prowess is better than the other in its simplest form. Spreadbetting – or taking a view on the difference between the cost of buying each currency - has found favour with the mainstream investor. Hargreaves Lansdown has seen between a 40-50 per cent pick up in its foreign exchange service in the past 12 to 18 months.

David Jones, chief market strategist at IG Index, says: “Clients have seen currency as a hot market over the past couple of years because of higher than normal volatility.”

Mr Jones says, although it would not be unusual for an investor to take a 12-month position on euro/dollar movement, the trend had become to access more exotic pairs. “This is a simpler way of trading particularly as these markets are so liquid. This also means that the costs are relatively small,” he says.

So, if the low fees and liquidity are already available on the pair you want, why bother betting on a basket of currencies that you don’t need. This could be the explanation for why ETFs as currency tools have not enjoyed the same success as some other vehicles.

But can retail investors really beat the market? High up in the shiny towers of London’s Canary Wharf are the high rollers whose daily positions would make several eurozone nations green with envy, and it is unlikely their strategies
and knowledge can be beaten.

But that is not necessarily important, according to Hargreaves Lansdown’s Mr Dimambro: “Their attitude to risk is different; retail investors usually look for longer-term trends rather than making millions in one day.”

But don’t be fooled, the gap is closing. Most forex platforms now offer real-time news and prices so even without access to a trading floor and pages of in-house economist studies, investors are able to take an informed view on market movements.