Currency E-mail your questions to:
richardw@apitsltd.com
How to be fl exible when forward buying currency
I’m searching for a property in Italy, to purchase sometime later this year. I’ve seen that the exchange rate has been as high as €1.20 and as low as €1.10. I know about forward contracts, but worried if I fi x the rate now it might then go back up! Are there any other options or is it a case of just leaving it to chance? JAMES BANTOFF, KINGSTON UPON THAMES
I can understand your quandary. Naturally, you want to achieve the best possible rate of exchange but equally don’t want to gamble on rates increasing only for the reverse to happen, and your budget to purchase being eroded by exchange rate fl uctuations. The problem is that the currency markets are impossible to predict and so, unfortunately, there is no way to guarantee you’ll achieve the best exchange rate within your timescale. There are however several strategies you can
employ to reduce your exposure as much as possible, and give yourself some control over your purchase. Simply leaving it to chance could be risky and is more than a gamble. A forward contract allows you to fi x today’s rate so you know the cost of your currency, however should rates then go up, you’re stuck with the price you fi xed. Conversely, holding for a higher rate could pay off but if Sterling continues to weaken, your costs could increase signifi cantly. Both of these options carry certain risks, the former having the advantage of a fi nite cost, regardless what should happen in the market.
A balanced strategy you could employ in your situation would be to forward buy 50 per cent of the euros you need now, and wait and see what happens with rates before securing the remainder. This way, should rates drop further, at least you secured half of your euros at a better rate. Likewise, should rates increase, you can secure your remaining currency at a better rate. This way, regardless which way rates move you have some level of protection and still
have the chance to gain should GBP/EUR
rates recover. 68 A PLACE IN THE SUN JUNE 2011
Alastair Archbold
is a foreign exchange trader at The Foremost Currency Group For further information call 0800 781 0601 or visit
www.foremostcurrencygroup.co.uk
May sees Sterling hit a 13-month low against Euro
The year so far has been a very volatile one for Sterling versus Euro. At the start of 2011, Sterling rose well against the Euro, nearing €1.20 on speculation the Bank of England (BoE) would have to raise interest rates. The result was the exchange rate gradually increasing, however as the chart clearly illustrates, it was not to last. A raft of poor economic data from the UK meant it became more and more likely the BoE would have to hold off pushing up interest rates for fear of de-railing a fragile economic recovery. As more and more poor UK data was released, Sterling slipped steadily against the single currency. Compounding the issue was the fact the European Central Bank (ECB) pushed up interest rates in the Eurozone, which due to the increased return for investors, strengthened the
Euro pushing rates even lower. As we entered May, rates hit a rock bottom of €1.1050 which is the lowest in more than 13 months. Further developments in recent weeks have, however, reversed this downward trend. Firstly, ECB President Jean
Claude Trichet signalled that further rate increases in the EU would not happen as quickly as the markets were anticipating. This weakened the Euro slightly, causing rates to recover. Secondly in the most recent
BoE infl ation report, Mervyn King said there was “a great deal of uncertainty about the outlook for infl ation”. Higher infl ation and lower growth was the sobering headline from the BoE. The markets reacted with
renewed speculation of an interest rate hike in the UK, and as a result, Sterling strengthened
against the Euro by four per cent in as many days. This sounds minimal, but on a property purchase of €250,000 (£221K) this equates to a difference of nearly £9,000, illustrating how quickly exchange rates, and therefore the price of overseas properties, can change. Despite this recent recovery,
there’s still plenty of scope for the outlook and, therefore, the BoE’s thinking to change. Any further bad news from UK Plc or indeed further rate increases in the Eurozone and the trend could change as quickly as the direction of the wind.
Speaking to a specialist
currency broker the moment you know you have a currency requirement can give you time to plan a strategy and look at the options available to protect against adverse rate movements.
Euro’s movement against Sterling in 2011
1.2000 1.1800 1.1600 1.1400 1.1200 1.1000
Feb 1, 2011
Mar 1, 2011
Apr 1, 2011
May 1, 2011
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