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New Year resolutions
that will save you money on your currency
By Sophie
Stride
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| December
is gone; chocolate boxes have been emptied, wrapping paper recycled, decorations
packed away for another year, all the batteries on the kid’s toys have
run low and parents everywhere are sighing with relief as the bleep and
whiz of the electronic toys has declined.
The currency
markets however are recovering from the volatility that December always
holds and trying to gather their thoughts on the direction that the major
exchange rates might take in the year ahead. This would be a very simple
process if the factors that affected these markets stood still but of course
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US interest
rates are headed higher but quite how high they will get before the new
head of the Federal Reserve, Ben Bernanke takes over, is open to question.
We think the US base rate will get as high as 4.75% in the coming months
but it may have to decline before the end of 2006 to avert a slump after
the boom that 2005 brought.
Meanwhile,
UK interest rates are flat and, with retail spending and manufacturing
output slipping in Britain, they may have to drop to forestall a further
decline in the UK economy. The interplay between rising US
rates and flat or falling UK rates should favour the US Dollar and we are
expecting a decline in the GBP-USD exchange rate in the first few months
of 2006. Only a sharp fall in the level of investment funds flowing into
the US from overseas would change that perception and that shouldn’t happen
as long as US interest rates are on the up.
The picture
in Europe is slightly different again with a market still in shock that
the European Central Bank chose to raise EU interest rates at a time when
the Eurozone was barely recovering from a period of economic decline. The
ECB seems to have sensed this concern because they have danced around any
suggestion that they might move their base rate again and we are expecting
the Eurozone interest rate to remain at 2.25% for a while. This should
allow the Euro-US Dollar exchange rate to slide towards $1.15 and possibly
lower before the US Federal reserve decides to stop raising the US base
rate sometime in the second quarter of 2006.
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The US Dollar is also
being buffeted by the Japanese Yen, which after hitting the weakest levels
in decades, bounced back dramatically during December. The first part of
the year is generally a time when the Yen strengthens. This is attributable
to the taxation laws in Japan whereby Japanese investors have to bring
their funds back home for the end of the tax year on 6th April.
Each year, the Yen strengthens until
April and then the floodgates open again for Japanese investors to get
their funds into an economy where they receive something more than the
0% that Yen deposits return. So don’t be surprised if the US Dollar – Yen
exchange rate and the Euro – Yen rate decline in the early part of 2006
before rebounding. |
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As for the
commodity linked currencies, things have never been so clear. The Australian,
New Zealand and Canadian Dollars are all immensely strong heading into
2006. The huge demands that China is placing on the commodity producing
countries and the high price of oil and gold have all conspired to keep
these currencies very strong. Anyone planning to move to any of these destinations
will have been cursing the low exchange rates and the way that these moves
have depleted their funds. We have seen a slight rebound through December
but these are still historically strong levels for all three of these currencies
and it will take a substantial change in the demand for commodities or
the markets demand for higher interest rate yields before these extraordinary
levels of strength are reversed.
So between
now and the next time we all empty our bank accounts and load up our credit
cards in order to play Santa Clause for the retail industry, the same truisms
that have always controlled the foreign exchange markets will still apply
to your international move.
Rule one –
the exchange rate will always be fantastic long before you are ready to
move your money and then dive the day before your funds become free. Don’t
worry, you can book the exchange rate when it is good and exchange your
funds when you are ready. It is called a forward contract and as a specialist
currency dealer, we have always made this facility available.
Rule two –
it is always the thing you are not watching that messes up your exchange
rate. When planning a move from America to Europe, you may be forgiven
for thinking that you only need to keep an eye on the EUR-USD exchange
rate but a rapid change in the USD – Yen rate will directly affect your
plans so use a specialist dealer to help you monitor the rates and warn
of impending hassle.
Rule three
– just because an exchange rate was great last week, never assume it will
get back there soon. The Sterling – Australian Dollar exchange rate fell
from A$3.04 in September 2001 to A$2.27 by July 2005. This was a very bumpy
ride but anyone waiting for the A$3 level to reappear would probably have
had to exchange at a far worse level or they are still waiting and may
be waiting for a long time to come.
These are simple
rules which make great New Year resolutions if you are planning an international
move and as long as you can keep these resolutions longer than the ones
about exercise, food and alcohol, you might just save some money as well.
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| Sophie
Stride is a foreign exchange consultant with Halo Financial Ltd helping
both private and corporate clients to simplify their currency dealings
and to achieve improved exchange rates through market insight. For further
information please contact +44 (0)20 7350 5474 or visit the website www.halofinancial.com |
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