How playing the currency market can save you money
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Whether you’re on a tight budget or have some wiggle room, it’s wise to play the currency market and make your money go as far as it can, says Dan Waterman
The property market is one of the most volatile and unpredictable in the world. In this article Dan Waterman of Excel Currencies explains how to make a game plan before setting out to purchase a property in France.
First of all, consider your own risk appetite. Think of property buyers falling into three categories of risk-takers: low, medium and high. Low risk takers might be on a tight budget or simply do not want the headache of currency risk, and they should think about exchanging what they need straight away. Medium risk takers are those who prefer to ‘not put all their eggs in one basket’, and should think about exchanging some initially and then setting reasonable rate alerts for the remainder. High risk takers tend to have flexible budgets or longer deadlines, and can adopt a ‘wait and see’ attitude and exchange bit by bit to hedge their bets.
Speak to specialists
Banks are not experts in currency exchange, and will not offer guidance on the FX market or provide you with necessary hedging tools to minimise risk. Above all, they will not offer competitive exchange rates. Specialist currency companies, however, will save you money with preferential rates of exchange, provide key market analysis and limit the stress and risk involved when converting your pounds to euros.
A common mistake people make with their budget is using the exchange rate they see on TV, Google or in the newspaper as achievable for their money. The first problem with this is that exchange rates change twice a second; they never remain still and react sharply to economic and political news all day, every day.
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Secondly, these exchange rates are advertised as ‘tourist’ or ‘mid-market’ rates and are simply not available to anyone. They are provided for guidance purposes only and achievable rates will normally be 1-5 cents below these publicly advertised rates, so it is important you do not use these when budgeting. The way to find out exactly what your sterling is worth in euros, is to speak directly to your bank or specialist FX company to obtain a live rate or to log into either trading platform.
Some currency specialists offer their clients a multi-currency account, otherwise known as an e-wallet. These accounts are very useful when buying and/or renovating property in France, especially if you have yet to open an account there. They allow you to make an exchange and drawdown the euros when required. Your high street bank doesn’t offer clients these types of accounts.
So, if for example, the rate is near the rate you have budgeted at, you can buy the euros and leave them on the account. Alternatively, if the rate is looking favourable or you simply do not want to gamble on the weeks/months ahead, again you can buy the euros and leave them on the account. You can hold both pounds and euros too, which allows you to easily exchange yourself if you prefer. These accounts offer a 100% safety of funds guarantee, unlike the UK’s Financial Services Compensation Scheme (FSCS) which only covers £85,000.
These are an essential tool when exposed to the currency market. Setting rate alerts with an FX company saves you the headache and worry of watching exchange rates all day, every day. Realistic high and low rates should be set, to allow you to capitalise when the rate spikes and to counter if the rate suddenly drops. You will be notified when either rate has been hit, and it will be up to you to decide on whether to go ahead with the purchase or not. The alternative to this is a limit order, which allows the system to automatically buy on your behalf, once your desired rate has been met.
The low risk takers and/or those on a tight budget, should seriously consider taking up this option. This is a ‘buy now, pay later’ product that allows you to lock in an exchange rate for a date in the future. A commonly used tool by companies that import goods from overseas, forward contracts are very useful for people buying overseas, as it takes currency risk out of the equation. A deposit between 3-10% of the transfer amount is required and then the remainder is due at the end of the contract date.
The downside with forward contracts is that you lose some points on the market when compared to a normal ‘spot’ (immediate) trade, because you are buying currency in advance and that comes at a slight premium. Another downside is that if the rate goes up during and at the end of your contract, you do not receive the improved rate.