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Making The Most From The Exchange Rate

Making The Most From The Exchange Rate

I have this recurring dream where I walk into my local bank to exchange my pounds into Australian dollars. I ask the teller at the foreign exchange counter what the current exchange rate is, and he says ‘Sorry sir, the rate just dropped slightly overnight down from 3.10 to 3.05…" Getting the best rate from your pounds can turn into an obsession. This article written by Ben Hirst explains some of the factors involved.

…. when is the best time to bring your money over?

I have this recurring dream where I walk into my local bank to exchange my pounds into Australian dollars. I ask the teller at the foreign exchange counter what the current exchange rate is, and he says ‘Sorry sir, the rate just dropped slightly overnight down from 3.10 to 3.05…’

Getting the best rate from your pounds can turn into a bit of an obsession, so I have written this article to hopefully help explain some of the factors that affect the exchange rate and what strategies you can use to maximise your returns when exchanging your pounds into Australian dollars.

Factors affecting the exchange rate

One of the key factors that affect the exchange rate between two countries are their current interest rates, set in most cases by the central bank in the respective country (i.e. Bank of England or Reserve Bank of Australia). Interest rate levels in a country help banks decide at what rate to lend money and, most importantly in regards to exchange rates, what rate of interest they give for holding people’s money.

A simple example of this is when we compare Japan with New Zealand. At the time of writing, interest rates in Japan are at 0%pa. This makes Japan and the Yen a very undesirable prospect for the Japanese investor who wants to earn some yields (interest) from their Yen. New Zealand however has the highest interest rates of all the developed countries at 7.5%pa. This makes it a very attractive proposition for Japanese investors to change their Yen into NZD and earn 7%pa yields on their NZD in a term deposit. If a lot of people start to buy NZD, market forces dictate that this will drive the price of the currency up. This will then make the NZD a much stronger currency, especially against the Yen.

Currently in the UK interest rates are 4.5%pa, where as in Australia they are 5.5%pa. This goes some of the way to explaining why the AUD is quite strong against the pound at the moment.

However, the exchange rate is affected by a number of factors and things can’t simply be explained by interest rates alone. For example, another factor influencing and giving strength to the AUD at the moment is the strong demand and high prices for commodities such as iron ore, especially from high growth countries like China and India.

Australia is a large producer of commodities like iron ore and uranium. A Chinese construction company who needs iron for a large building project will need to purchase AUD to pay for this iron ore imported from Australia. Obviously, if a lot of Chinese and Indian construction companies are buying AUD to purchase iron ore in Australia, this is again going to (via market forces) drive up the price of the AUD.

So what is a decent exchange rate to expect from GBP, when you change it into AUD?

If you look at historic charts over the last 12 years, the GBP/AUD has fluctuated down as low as nearly $1.85 (£0.5405) to a high of around the $3.00 (£0.33) mark. The actual average exchange rate since 1990 is $2.38 (£0.4201), which is just about what the level is now.

If you chart the historical movements of the GBP/AUD, they can normally be quite accurately linked to interest rate differentials. If the UK has higher interest rates than Australia then the pound has generally been stronger than the AUD. If Australia has had higher interest rates than the UK, then the Aussie dollar has been stronger.

So at present, unless there is a drastic change in interest rate policy by either the Bank of England (i.e. rises) or the Reserve Bank of Australia (i.e. cuts), or if there is a big drop off in world commodity prices, realistically at present an exchange rate of around $2.40 (£0.416) will be the best you could hope for. However, the rate could get a lot worse if the Bank of England decide to cut interest rates again to boost growth in the UK economy. Remember when they cut interest rates in August after the London bombings the pound dropped to $2.26 (£0.4424)!

When is the best time to bring your money over?

It is always hard to capture the highs of the exchange rate and get the most for your money. It is however worth being patient and not exchange all your GBP straight away. For example, if you were holding £300,000 and changed it at $2.32 (£0.4310), you would be holding $696,000 AUD. However if you changed the same amount of GBP at $2.38 (£0.4201), your AUD amount would be $714,000, a difference of $18,000, the price of new small car in Australia!

One way to maximise your returns would be to bring over enough GBP to get yourself established in Australia, i.e. enough to cover rent and food for the first six months while you look for work. You can then look to bring the rest of your GBP over at a later date, when the exchange rate will hopefully be more favourable for you.

A lot of UK migrants bring all their money over straight away, feeling the need to purchase a property immediately on arrival in Australia. However, with the housing market in Australia very flat at the moment – and likely to remain so for the next few years – it is certainly worth taking your time once you move over. This will give you a chance to get a feel for the most suitable areas for your desired lifestyle. Playing the waiting game could allow you to pick up a good bargain in the housing market and on top of that, get you a good rate for your GBP.

{mosbanner right}One of the best ways to get a decent exchange rate is to get your bank to set up an overnight order or limited order. This means you can instruct your bank to buy your GBP and sell you AUD at a target rate that is better than the current market rate. Foreign exchange markets are open 24 hours a day and it is very easy to miss out on overnight volatility that can occur in the market and push the exchange rate up to a better rate. The GBP/AUD is one of the more volatile currency pairings in the world and can easily move over 2 cents in overnight trading. So it is worth trying to capture the highs in the market this way.

Another good way is to bring over your GBP to Australia and hold them in an Australian bank account as GBP. It is possible then to hold them in this account earning interest in GBP and either set an overnight order or monitor the exchange rate yourself, until it goes in your favour. This has the advantage of having your money easily accessible and not having the frustration and time difference problems of contacting your bank in the UK to transfer your money over. The foreign exchange markets can move rapidly and it is very easy to miss out on a good exchange rate, due to delays in bringing your money over, either through banking legislation red tape, or just the slowness of the transfer process.

It is also worth getting to know your financial consultant or the exchange rate people at your local Australian bank. You may be able to bargain a better exchange rate, especially if you are exchanging a large amount of GBP.

Hopefully some of this information will be useful to you, in regards to maximising your returns on your GBP. Remember every extra cent you can squeeze out of the exchange rate is going to help you in the long term in setting up your new life in Australia.

Ben Hirst is a financial consultant at Citibank Wealth Management Banking in Australia. If you need to contact the author for further information please email him at [email protected]
Disclaimer – this article reflects the opinion of the author and not necessarily Citibank.