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By Elisabeth Dobson, Head of Private Clients at World First

Fluctuations in the exchange rate can make a tremendous difference to the value of your funds when moving your money overseas. Therefore, it is vital to time your currency exchange correctly so that you can get the most for your sterling. Leaving the exchange until the last minute could cost you hundreds, or even thousands, if the exchange rates move against you or money is converted at a poor rate.

Economic data releases, such as interest rate announcements, and house price and unemployment information, can have a huge impact on exchange rates. For example, when a country’s government announces it is going to raise interest rates, this typically increases the value of the currency and can therefore have a positive impact on the exchange rate. Likewise, if a country announces that its economic output is falling or that it is going to drop its interest rates, this can have a negative effect.

The global recession has resulted in the currency markets being even more volatile than before and rates can move by several percentage points over the course of a single day.

Getting the best rate

Specialist foreign exchange brokers follow the markets closely and provide a bespoke service to their clients to help them achieve the best exchange rate for their transfers, and offer a number of different products to achieve this. Currency brokers can give you a valuable insight into how the rates are moving and the outlook for the coming days, weeks or months.

If you do not need to make an exchange immediately it may be beneficial to hold off for a few days if there is a chance that the exchange rate may improve. Some foreign exchange brokerages have a team of in-house economists who publish daily economic updates about the market and upcoming data which may impact the rate.

The main benefit to exchanging money through a FX specialist rather than a bank, though, is cost. Foreign exchange firms keep their clients fully informed of movements in the markets and offer far superior exchange rates than they would normally get from high street banks. Savings can vary from between 1 and 4 per cent on the exchange rate alone, and specialists do not typically charge any fees for transmitting the funds abroad, unlike the banks which can levy as much as £40 in fees or charges. Therefore, if you are emigrating and transferring a large sum of money – such as the proceeds of a property – a foreign exchange company could potentially save you thousands.

Strategies

Currency brokers offer a number of different products and strategies which are not offered by the banks. The most common type are called ‘spot’ and ‘forward’ contracts. A spot contract is a short-dated product whereby you agree to take a delivery of a certain amount of currency at a specified exchange rate in two working days time.

A forward contract works slightly differently, in that you can reserve the exchange rate up to two years in advance with a 10 per cent refundable deposit. This can be useful if the exchange rate is particularly favourable now but you do not need to wait to make the conversion at a particular time in the future. For example, if you were emigrating to America in January 2010 but wanted to take advantage of a favourable rate now, you could pre-book the rate in advance with a forward contract. This can be particularly useful if you do not have the majority of your funds available until your property in the UK is sold, as you can fix the exchange rate with a deposit and protect yourself from fluctuations in the exchange rate.

There are a number of different FX options available to emigrants and a qualified broker can explain these to you and advise on the most suitable hedging strategy, based on your circumstances.

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Elisabeth Dobson works for World First currency exchange brokerage, which now offers a ‘Currency Options’ service.

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