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Money Never Sleeps (especially British Pounds)

Exchange rates fluctuate every minute of the day, 5 ½ days a week. The market does not open and close as such, it just moves from London to New York to Asia to London and so on, as they say “Money Never Sleeps”. Most people don’t have time to watch the market day and night. Matthew Gilmour tells us how to beat this problem with a 'limit order'.

Exchange rates fluctuate every minute of the day, 5 ½ days a week. The market does not open and close as such, it just moves from London to New York to Asia to London and so on, as they say “Money Never Sleeps”.

Most people simply don’t have time to watch the market day and night to optimise the exchange rate they secure for transferring funds abroad, and that can mean less money for their new life overseas. One way to beat this problem is to place a “˜limit order’ with a foreign exchange provider targeting a more advantageous rate.

What is a limit order?

A limit order is a commitment by you the client  to buy (or sell) one currency in exchange for another, at a pre-agreed rate. For example you may not be willing to exchange Pounds for A$ at the current rate of GBP/A$ 2.4700 but be willing to exchange at 2.5000, so you call a foreign exchange dealer and arrange a limit order to sell X Pounds for A$ at 2.5000. You then have to wait for the prevailing rate to reach 2.5000 before the transaction is completed, at which time it will be binding on you.

The Pros

The limit order is likely to be executed (or filled) if it is set not too far away from prevailing rate, meaning more A$ will be received versus accepting the prevailing rate at the time the limit order was placed.

The Cons

Dramatic fluctuations can occur in exchange rates. If the GBP/AUD plunged from 2.4700 to 2.4000 after you placed your order (and never reached your target of 2.5000) then you have a problem. Do you hold out for a dramatic (but unlikely) move back to 2.5000 or do you accept that the market has moved and target a lower level, perhaps even cut your losses and convert at the prevailing rate so as to remove the risk of further declines.

An Example

Peter and Sue are moving to Australia and have 6 weeks before they must convert ₤200,000 for their house settlement. After some discussion, they decide that they would be happy to convert their money at a rate of 2.5000.

While Peter began frantically watching exchange rate charts (like the one on the left) and panicked with every fall and sweated on every rise, Sue contacted a foreign exchange provider and arranged a limit order at a rate of 2.50 when the prevailing rate was 2.4800. Even though the rate spent only a short time above 2.5000, Sue’s forex provider was able to make the transfer at this rate and they all lived happily ever after.

Obviously any rate that you are deciding on would have to be realistic – trying to get an exchange rate of 2.75 during the above period would be akin to me trying to sell my 1984 Honda Civic for ₤10,000. However, the above chart demonstrates that limit orders really can make a difference. It shows the 6 weeks from the 10th of October until the 18th of December, with a low of 2.4536 and a high of 2.5195. Peter and Sue may not have converted their money at the highest point but they’ve taken advantage of a brief swing in their favour to convert at a rate that was higher than both the low and the average exchange rate for the 6 week period.

It is important to note that as with any financial transaction, limit orders do involve some form of risk. Had the market not reached Sue’s target rate of 2.5000, the rate may have continued to fall and ended up lower than the initial exchange rate.

Whilst limit orders are a great tool for removing stress and heartache from a forex transaction, choosing the right foreign exchange provider is crucial. Some providers will suggest that clients let the dealer choose the transfer rate by claiming that they are experts and can pick a good rate.  This is usually a method used by the dealer to maximise the margin taken on the deal. No one can accurately predict exchange rate movements and one should be wary of people who claim they can.

OzForex offer limit orders to our clients free of charge. All limit orders are monitored 24 hours a day by our Sydney and London dealing rooms. That means that no matter what time the day or night, we are taking care of your forex needs. You really can do it while you sleep!

About the Author: Matthew Gilmour is the Managing Director of  OzForex.com.au & Tranzfers.com

©Matthew Gilmour