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Why are the rates up and down each day and why are they where they are at all? None of this is explained and so potential migrants have every right to wonder how complicated it will become when they are planning a real and lasting escape to a new life in a new country where funny money will eventually become the norm! To most people, foreign currency is all about that funny money you get when you swap your money at the airport ready to blow it all on your holiday in the sun. In some places you’ll walk away with a barrow load of funny money whilst in others your money seems to shrink alarmingly. In either case, it’s hard to tell sometimes whether that ‘five whatsit note’ in your hand will buy a cappuccino, a baseball cap or a 5 carat diamond. Halo Financial is a specialist foreign exchange dealer delivering a carefully structured service helping migrants to save money and even increase their wealth when they move across borders. In the pages that follow, David Johnson, a Director of the company with 11 years experience of handling the currency needs of private and corporate clients, explains some of the common problems that migrants face when planning their move, as well as some very simple ways to cut currency risk and help de stress even the most nervous migrant by removing some of the anxiety that migration brings. David and his team are often alarmed to get calls from clients that go something like this, “I’m boarding a plane for Australia in three days; I’ve just completed on the house sale and I need to swap £250,000 into Australian Dollars. A friend told me about you but how does it work?” This last minute rush is usually set against a familiar backdrop; where the client has moved out of their home, has packed away all their proof of ID documentation (essential for establishing a trading facility with a specialist currency dealer) and, because they haven’t the time to use the volatility of the exchange rate to their advantage, they end up with a far smaller nest egg when they arrive in Australia than they should. However, at least this person has had the foresight to use a specialist. Most migrants will use a visa specialist, maybe an emigration specialist, a removals specialist, a pensions and investments specialist and then curiously, when it comes to their hard earned money, they allow a jack-of-all-trades; namely their high street bank to exchange and transfer their wealth. The bank’s foreign exchange clerk will have a perfect grasp of holiday money but isn’t trained to understand the movements in the currency market and doesn’t have access to the interbank market rates, sentiment or insight that is required to obtain the best exchange rate for large sums of money. Consequently, you receive virtually no information and suffer exchange rates that bear very little relation to the real market. Using a good specialist will ensure you gain an understanding of the exchange rate that affects you and a far more attractive exchange rate when you trade. So Rule 1 on the migrant’s currency planning is to speak to a currency specialist. Rule 2 should be to have that conversation as early as possible in your planning period. The earlier you speak, the greater the chance that your foreign exchange dealer will be able to help you save money or avoid currency risk. What can alarm people is the fact that exchange rates are so volatile. Most migrants will check the exchange rate once in a while or even once a day in order to get a ‘feel’ for the movement. David comments that “I am delighted when clients have
a reasonable understanding of the exchange rate but very few people see
the real movement because exchange rates move every second of the day”
Someone checking these opening prices would be forgiven for thinking that the exchange rate fell in an orderly fashion throughout the week and that unless you bought your Rand on Monday, you would have got a progressively lower exchange rate as the week unwound. In fact, the highest rate of the week came on Wednesday 29th when the market peaked at R12.2553. David explains that, “This isn’t seen on the daily opening rates but, I’m trained as a technical analyst, and technical analysts are looking at patterns of trade. The top of the channel for GBPZAR (the screen code for the British Pound-South African Rand rate) at that time was R12.25 and it would be as the exchange rate moved toward that level that I would call my clients.” Where migrants are not aware of the intraday market volatility and/or the significance of market analysis, the effect will be that Rand buyers are panicked into buying. This is either because they see the exchange rate drop and don’t know why it is falling, what range the currency is trading in and therefore how far it is expected to fall, or because they buy on Wednesday at the wrong time of day because they have no concept of the highly volatile nature of the currency market. In either case, the missing factor is ‘Why’. David puts it this way, “If you held shares in a particular company and you checked the share price one morning to find that it has trebled in value, should you sell, hold on or buy more shares? The answer is that until you know why it has moved, any decision would be guesswork.” The point is that a foreign exchange dealer is in the market watching the developments as they happen and if you have a facility with a good currency dealer, they will make sure you know when the exchange rate has moved and why, allowing you to decide whether to buy your currency immediately or wait. So Rule 3 might be to find out why the exchange rate is moving before trading. Rule 4 is to buy or book your currency when the exchange rate is right rather than when your funds are liquid. Murphy’s Law will ensure that the exchange rate is fantastic before you are ready to transfer your money but drops when you are and when this happens it is akin to arriving on holiday in the midst of a monsoon and standing in a hotel lobby dripping wet while the receptionist informs you that the heat wave they have enjoyed for the last three months broke last night. A better exchange rate will save
you money so letting it slip by makes no sense at all. A specialist broker
should offer forward contracts allowing you to book the exchange rate today
but delay the exchange of funds until a future date that coincides with
the sale of your property or the release of any investment funds you may
have. This is best explained in an example.
Her US$200,000 now only bought C$244,000 meaning that she arrived in Toronto some C$31,000 worse off in only four and a half months. Now Emma is a fictional character but the exchange rates quoted are absolutely real and serve to demonstrate the harsh impact that exchange rates can have if ignored. Emma’s plight could easily have been avoided if she had bought the Canadian Dollars in advance and taken advantage of the C$1.3750 exchange rate while it was available. She could have done this through a Forward contract. This is an agreement to buy an amount of currency for a date in the future at an exchange rate agreed there and then. Obviously, this avoids any change in the exchange rate in the intervening period and removes any risk from currency fluctuation. A Forward contract is usually supported and secured by a 10% deposit. However, don’t despair if you do not possess 10% of your transaction value as you can still fix an exchange rate against a percentage of your wealth. This is not uncommon and going back to the example of Emma, if she only had US$10,000 available to support a US$100,000 trade, she could have saved herself C$15,500. And, whilst the US Dollar-Canadian Dollar (USDCAD) exchange rate has been used in this example, the volatility is evident in almost all currency pairs. The British Pound-US Dollar (GBPUSD) has moved by over 10% this year, British Pound-Euro (GBPEUR) by 8%, Euro-US Dollar (EURUSD) by nearly 14% and the US Dollar– Australian Dollar (USDAUD) by 7.5%. On a more positive note, some of those moving sizable sums across borders will have benefited from the moves. Americans moving to the UK who waited to exchange their funds through the first part of 2005 have been handed a 10% bonus on their money. In December, they would have had to pay $1.95 for each Pound they bought. At the time of writing, they would only have to part with $1.75 per Pound and so they arrive in Britain with 10% more spending power. So Rule 5 is that sometimes the best action is inaction. The problem for most migrants is that they simply don’t know or cannot find out where the exchange rates are gong and the ‘why’ factor is the key to knowing whether to act or wait. One of Halo Financial’s clients, Sue Tamasauskas, summed it up as. “All I really wanted to know is, should I sell my Pounds now and, if not, when? It’s that information that David delivers.” That is probably the neatest encapsulation of the concept of market insight and it is precisely this level of market intelligence that is missing from the high street bank currency facility. Should I wait or should I act, is the eternal dilemma for migrants and without a full understanding of the facilities available, very few private individuals, who have only ever encountered exchange rates when changing their holiday cash, could possibly have sufficient experience to make a proper judgment on this. Add to this confusion the dreadful terrorist related events in London on 7th July and the dramatic effect that such traumatic incidents have on the financial markets, and that lack of instant information and experience can be very expensive. Another of David’s clients, Nicola Walker sums it up expertly, “I didn't
know anything at all about exchange rates and markets, but thought my bank
wanted to charge me way too much when buying a property abroad. I was recommended
to Halo Financial by someone who had already bought abroad. In clear, plain
English, Halo explained how the markets worked and what they could do.
I was both reassured and impressed. They even sent me regular financial
updates in an eminently readable and understandable format. I highly recommend
them.”
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