AN UNCLEAR PATH
Every quarter, Smart Currency Exchange release forecasts, examining the expectations of the major banks for the coming three, six and 12 months. For almost every quarter this year and into next, the spread in the predictions is remarkable. In June, for example, the banks expect the Pound against the Euro to be at anywhere from €0.95 to €1.17.
It goes to show the impossibility of truly predicting where the currency markets are going. If any single one of these predictions is correct, then, by default, the majority are wrong. And, in the case above, it could be the difference between £500,000 returning you anything between €475,000 and €585,000.
That said, forecasts still have an important purpose. It’s not about trying to second-guess or play the markets – especially when this could cost you thousands – but rather about understanding the risks and how you can properly plan for them.
A NEAR-ENDLESS LIST
So what are the key factors in this quarter’s forecast? Firstly, of course, is the coronavirus pandemic. With GDP growth plunging across the world and unemployment rising – plus concerns that a second wave could arise – it’s a difficult time for many economies. Central banks are working hard to provide as much stimulus as possible, but that means in some ways the currency markets are even more volatile. Currencies move as much on rumours as facts, so recent speculation over negative interest rates in the UK, for example, saw the Pound fall against the Euro.
However, it’s important to remember that there are pressing dates beyond coronavirus. Brexit has fallen off many people’s radars, but the UK Government has a deadline of 30 June to request an extension to the transition period if trade talks do not progress. So far, talks have shown little compromise from either side, but the UK Government has said it will not seek an extension, meaning that there will then be a race to get a deal by the final deadline of 31 December. If that deadline is not met, it could mean a return to WTO rules.
Likewise, tensions are rising between the US and China. The two countries had previously agreed a ‘phase one’ accord to end their trade war, but this looks to have little long-term impact. The US is continuing to accuse China of cover-ups on the spread of coronavirus, while Congress also puts on pressure over Hong Kong. Taiwan, the other claimant to the title of ‘China’, is using the opportunity to make inroads diplomatically.
China has placed an 80% tariff on Australian barley, after the latter called for an investigation into the country’s handling of the virus. It raises fears that the same could apply to America and other countries, including the European nations backing Australia’s requests.
HOW CAN YOU PROTECT YOUR MONEY?
The problem is complex, but the solution is simple – you need to put in place a risk management solution in advance. This is where a currency specialist can prove invaluable compared to simply sending on the day through your bank.
For many people, the answer is a forward contract. This means your currency broker secures you a fixed exchange rate for a period of time, say 12 months, and that rate does not change. If the markets suddenly drop, it doesn’t impact you.
The method is simple. You agree to a rate and the total amount you will be sending in the fixed period. Upon payment of a deposit the broker purchases the entire sum of currency for you leaving you free to pay when needed. This leaves you safe in the knowledge that your money is secure, no matter what happens this year, so you can focus on carrying out your plans.
For expert guidance on currency markets or help with transferring money overseas, request a free account with Smart Currency Exchange online or contact your nearest office.