CURRENCY
ANY QUESTIONS?: CURRENCY
POUND AT FOUR-YEAR HIGH AGAINST THE EURO
Currency expert Alastair Archbold of Foremost Currency Group I
n recent weeks we have seen the Euro continue to weaken, which has made the single currency its cheapest to buy in nearly four years. This is great news
for those looking to buy property overseas, especially with many bargains to be had in some of the EU countries that have had problems maintaining their debts such as Spain, Portugal and Italy.
So why are exchange rates so good? It’s all to do with the continued debt problems in Europe that have now spread to Italy, Cyprus, Portugal and Spain. Investors remain very bearish about the euro due to the currency bloc’s festering debt crisis, and this was compounded in recent weeks by a decision by the European Central Bank (ECB) to lower their interest rates. The rate was cut to 0.75% and this
weakened the euro considerably. When a central bank cuts interest rates it means less return for investors, and thus the associated currency often weakens as savers look elsewhere for better returns. The continued uncertainty about the Spanish banks’ bailout package along with expectations of further interest rate cuts by the ECB is putting further pressure on the euro and analysts said more losses could be in store, especially against Sterling. All of this has helped push exchange rates
through the €1.27 barrier which is the best we have seen since the end of 2008. The cost of purchasing a €200,000 property today compared to November last year is a staggering £20,000 cheaper, clearly illustrating how much the rate has improved in recent times. It is important to remember that there is no fundamental strength in the Pound; against other currencies such as the Australian Dollar we are at an all-time low.
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The UK is still mired in recession, with the Bank of England again having to resort to another round of Quantitative Easing in order to try and stimulate the economy.
So what is likely to happen next with the sterling/euro rate? There are differing points of view as to which way rates may move in the coming weeks and months. Taking the euro on its own, it is likely to weaken further however this does not necessarily mean that rates will continue to climb. The UK is inexorably linked to the EU debt crisis, with some leading analysts warning that the storm could soon start to affect the UK economy. So if the crisis does continue to deepen, it could start to weaken sterling that would take the steam out of the rising exchange rate. Also worth considering is the Bank of
England and UK government do not want the exchange rate to be as high as it is; it’s affecting our exports, of which 50% go to the eurozone, and the government are banking on an export led recovery. For this reason I wouldn’t be surprised to see gloomy statements by the BoE in the coming weeks with the intention of bringing the rate back down to make exports more attractive to those in the eurozone.
So if you will need to buy euros in the next 12 months what should you do? With rates at their best in many years, a clear strategy should be employed to ensure you don’t end up paying more than necessary due to adverse exchange rate movements.
The fi rst option is to fi x your exchange rate now with a ‘Forward Contract’. This allows you to fi x the current exchange rate for up to two years, but only lodge 10% of the total you want to convert. In this way you can budget effectively and know what your euros will cost you, although if the rate keeps going up you will be unable to take advantage of any further gains. If you think rates may continue to rise and
want to take a ‘wait and see’ approach, then a good strategy is to place a ‘Stop Loss’ order to cover you should things not go your way. This allows you to place a lower level, for example €1.24, and should rates fall below this your currency is secured automatically. This method allows you to continue to take advantage of any gains, but have a worst case scenario should the market move against you. Whatever you decide to do your fi rst step should be a consultation with a currency broker to discuss the different options available and choose what is right for you. What you should not do is simply sit on the fence and hope things will go your way. Hope is not a reliable economic tool and could end up costing you dearly.
GBP cost of €200,000 property
£195k £185k £175k £165k £155k £145k
Dec ‘08 Dec ‘09 Dec ‘10 Dec ‘11
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