We will be adding to this article with a new FAQ from our partner Currencies Direct every week, giving a complete knowledge base of currency information...
Week 11:
What happens if my house purchase falls through?
If you have not purchased any currency before the purchase falls through then naturally you will have no obligation to buy any currency through an fx broker -e ven if you are registered. However if you have already agreed and bought the purchase of your foreign currency on a forward contract to guarantee the rate of exchange for the property purchase then you will have an obligation to see the purchase of that currency through in theory.
In this situation you have the option of trying to find another property to purchase and thus make the initial purchase of the currency necessary again. If this is not the case, your fx provider can sell the contract back to the live market to eliminate the need for you to pay for the currency and take delivery of it. In this case the live rate at the time of selling the currency back and reversing the buying order will dictate wether you lose or gain on this. For example if you buy at 1.15 and in 6 weeks you sell back euros to buy GBP at 1.10 you have made a profit of 5 cents on your pound, on the flipside if you buy at 1.15 and sell at 1.20 you have made a loss of 5 cents on your pound. Answered by Phil McHugh.
Week 10:
If I’m looking to buy a house in France when do I need to start thinking about currency exchange?
The purchase price of a property is always a top priority and the price factor is especially important when buying in a foreign currency as the price changes all the time with the movements in the fx market. My advice would be to look at the currency before you buy and work the currency rate into your budget. At the moment we are seeing a rally on GBP/EUR to 1.17- if I was looking to buy now I would work my property value on the exchange rate of 1.10 to give myself a good buffer should the value of sterling fall against the euro.
As property purchases are normally handled on a stage payment basis a conservative buffer is highly recommended. Once you have agreed the purchase of your property you can then look to achieve a buying rate that lies over your budget – you can even lock in the exchange rate on forward contracts if you have stage payments to think about and this will guarantee you meet your budget. If the rate is moving higher and in your favour you can monitor the rate and fix the rate if hits higher levels- as long as the exchange rate is comfortably above your budget rate then you can try to get the most out of the exchange rates on the upside over your budget level. The important factor is to look at the currency early and plan for your currency purchase(s) to ensure that you do not meet any nasty surprises at a later stage. Answered by Phil McHugh.
Week 10:
What should I look for when choosing a foreign exchange company?
Obviously the main motivation to choosing a foreign exchange company in the first place is to save money- however to many this motivation involves dealing with an industry sector that is alien. Therefore the first thing you should assure yourself of is that the company is well established, for example- you can check to see if they are registered with HM customs and excise, how long they have operated for, their financial history. Once you are comfortable with a company or a choice of companies you then need to look at your specifics.
If you are buying a property then a company that specialises in currency transfers for property payments will help, if you are a business you want a specialist corporate service- most of the main companies will provide both. If you simply need to send monthly payments to France for a mortgage payment or an income- does the relevant company have a plan for this? You then need to look at your approaching transactions and find out what charges if any will be levied by your shortlist of companies. At this point it would be good to speak to a representative of each company and get a feel for how they can service your requirement exactly from registration to completion of transfer- is the service helpful and specific to your requirement? If a company or companies fulfil the above you have a good grounding to open an account(s) and start to use the service. Answered by Phil McHugh.
Week 9:
What are the main economic factors that can affect currency rates?
The currency rates are influenced by a number of elements which conspire to affect the markets. The FX market is one of the largest and most liquid markets in the financial world with an estimated trading volume of between 3-4 trillion per day. The supply and demand for a currency and hence its relative strength against other currencies is motivated by a number of factors…the main drivers being split into the categories of economic, political and other market factors loosely related to the psychology of the market. Economic indicators will generally identify the health of an economy and will be reflective in the country’s currency value. These will comprise of fiscal policy (interest rates), inflation levels, GDP levels, employment data, retail and manufacturing data, house prices and budget deficits - if you look at the sharp downturn in the UK recently you will see the pattern of a falling pound with a weakening economy and falling interest rates.
Other influences will be political- internal and international politics can have a major impact on FX- generally political uncertainty will weaken the currency- examples of this have been seen in Thailand and Pakistan where uncertainty surrounding coalition governments led to weaker currency values. Other factors that can be prevalent include analysts and speculators looking at technical trends and long term trends to invest in a certain currency. Investors may also seek “safe haven” currencies in unsettling global markets- a theme strongly witnessed recently with a flight to Japanese Yen, Swiss Franc and US dollar amid the global downturn. The convergence of these and other smaller facets ultimately paint the full picture of the markets and the more pronounced the influences are the more volatility the FX markets experience. Answered by Phil McHugh.
Week 8:
Why should I not just exchange my money with a high street bank?
The High street banks do currently handle the majority of currency conversions and international payments. However when buying or selling currency through the bank you will potentially be missing out on improved exchange rates and lower transfer fees. At Currencies Direct we deal directly with the currency markets and bulk buying power will provide you with an exchange rate that the banks find hard to beat.
By dealing with a specialist in foreign exchange payments rather than a bank you will benefit from a tailored service with a variety of product choices to suit your needs including spot deals, forward contracts, limit orders and regular monthly or quarterly payments for a mortgage or pension income.
You will speak directly to a currency specialist who will explain how the buying options can help save you money on the purchase you are making and give you all the options. You will also have the benefit of that person keeping in touch with you on the market movements and alerting you when the rate is trading favourably- a service that the banks will not provide and especially relevant with current exchange rate volatility. Answered by Phil McHugh.
Week 7:
What is your outlook for the GBP/EUR pairing during the remainder of 2009?
At the start of the year the pound was in the doldrums and talk of parity and below echoed around financial circles… both the UK and Euro zone economies are seeing very similar patterns with a sharp contraction in GDP and unemployment levels rising.
Recently the pound has started to show some form and the slashing of interest rates in the UK and the introduction of Quantitative Easing has been accepted as the necessary steps to try to counter the slowing economy and put the UK back on the road to recovery.
Contrastingly the European central bank has been slow to act and have only just announced measures to buy bonds- a form of QE, their interest rates also remain 50 basis points higher than the UK. Therefore I feel that going forward the Euro zone will need to do more especially in the light of further contraction and slashing of growth forecasts.
The UK should therefore be ahead of the curve and previous proactive action by the treasury will help the pound gain against the euro as 2009 unfolds. In addition if global equity markets recover the pound will retrace some of its losses- the pound was heavily sold ahead of the euro in the worst of the equity slump. The equity markets may now have found a bottom and look to advance and so too should the pound gain against the dollar and the euro. My forecast is to see the pound back to 1.25 by the end of 2009. Answered by Phil McHugh.
Week 6:
What are the advantages and disadvantages of the different currency contracts?
1) A spot contract is the purchase of currency for immediate delivery- normally within 2 working days. The main benefit of a spot purchase is that the exchange rate quoted is taken directly from the live market rate as a back to back quote. In addition a major benefit in entering a spot contract is that you can fix the rate and then pay for the currency within 2 working days in full knowledge of the exact rate you have secured. A spot contract also allows for a swift onward settlement and so is ideal for getting funds from A to B quickly- so for a deposit payment on a property. On the downside you will need to settle in full for a spot contract within a 3 working day period.
2) A forward contract allows the purchase of currency now for a specific date in the future- a deposit is generally required of 10% as a rule to fix the rate for the future date, with the outstanding settlement amount of 90% due on the agreed date in the future. This is an excellent tool for stage payments on a property as it allows you to lock into an exchange rate from the live market now and therefore you have the certainty of your costs now with only a 10% outlay of funds- especially useful given the current volatility in the fx markets. A disadvantage of a fixed forward contract is that usually it is fixed to a specific date and therefore you cannot utilise the purchased currency earlier than the agreed date. The rate you achieve is normally different from the spot rate as it is calculated on interest rate differentials- at the moment however interest rates in the UK are very similar to Europe the rate you achieve is similar to the spot price.
3) A time-option contract is in principal the same as a fixed forward contract and maintains the same benefits and deposit requirement. The only difference is that a Time-Option provides you with the ability to draw down and take delivery of the currency before the agreed end date. This can be in increments or as the whole amount and provides great flexibility especially if the exact payment date is not known or if various payments are required to be utilized from the sum of currency purchased. Again this is especially useful for property stage payments or to hedge business invoice costs.
Week 5:
How long will it take for my funds to arrive once you receive my cleared funds?
The length of time it will take for your funds to reach you will vary depending on the currency you are sending and where the funds are going. In general payments made in Euros to a Eurozone country, payments in USD to the USA, CAD payments to Canada or GBP payments to the UK can arrive as early as the same working day that Currencies Direct send your payment. Generally payments in other currencies or to other countries take longer and may take an additional 1-2 working days to arrive. The length of time it takes for the funds to show in your account may also vary depending on how quickly the beneficiary bank act upon our instruction to credit the payment to the beneficiary account.
Week 4:
How do I know I am getting the best possible rate?
Always register as a client. Currency companies will offer you free registration and you will be under no obligation to use their services, but if you are not a registered client they can offer you a price without necessarily having to honour it. As a registered client you will get a reliable understanding of the price each company is prepared to offer. Registration will typically take no more than 5-10 minutes for any company and does not commit you to trade with them.
It has been said that it is always best to shop around and to a certain extent this is true. However, when sending money overseas always use a company you recognise and trust; using just one company is not the best way to get a competitive rate. Word of mouth is as good an indicator as any, but also look at how long the company has been in business, where they are based and rely on the responses you get when actually talking to their staff.
Get quotes from at least 2 brokers on the exact amount you wish to transfer. It is always the case that a company can improve on their first price, so be as honest and as open as possible. It is not in your interest to hold your cards close to your chest as you will find that a broker will be more than happy to improve on the price offered by the competition if they are aware of what they have to beat. .
Week 3:
Does the rate change while my funds are clearing?
When a client agrees an exchange rate and a 'deal' with a Currencies Direct dealer they do so on a recorded secure line. The rate they instruct the dealer to buy or sell currency at is then booked and guaranteed. Sterling amounts typically take 3 working days to clear with Currencies Direct, and during that time the rate is completely secure at the price agreed between the client and the dealer, even if the market has moved.
Week 2:
How do I get my money to you?
The most popular and efficient way for clients to send funds to honour a transfer is by online banking. This method enables the client to store Currencies Direct's account information making it far easier for subsequent transfers.
Alternatively, clients can also instruct their bank, in branch, to electronically transfer funds. In this instance clients can request that their bank send funds either via a BACS transfer (free - 3 working days to clear) or as a CHAPS transfer (subject to fee - 1 working day to clear).
Currencies Direct also permits clients to hounour a transfer by direct debit or by debit card. There is typically a limit applied to a debit card transfer, but we are able to accept anywhere up to £40,000 in one payment, and details can be exchanged over the phone.
Week1:
Is the published exchange rate what I’m actually going to get when I trade?
Unfortunately no. Any exchange rate you see published online, whether it be on a broker's website, BBC, Bloomberg or a 'live' trading platform, should only be used as an indication. Online sites can be anywhere up to 15 minutes behind the live market price, and they display what is called the interbank rate. The interbank rate is the rate that banks buy or sell currency at between themselves, and as such cannot be achieved by an individual. Having bought their currency at the interbank rate, your bank will then sell it to you at the 'high street' or tourist rate. The tourist rate will typically be 3 - 4% below the interbank rate. Currency companies will buy currency very close to the interbank price, and are able to do so because of the volumes of currency they are buying and selling. They will sell to you, the client, at a significantly smaller margin than the banks.
Do not use published exchange rates as anything other than an indication. Currency companies should always quote you prices live over the phone, as once you are registered the price must be tradable and they have to honour it. As an unregistered client be wary of anyone who quotes you an exchange rate that is too close to the interbank price, as it is more than likely you will find this price has changed by the time you are a fully registered client.
Tel: 0845 130 8148 | Email: london@currenciesdirect.com | www.currenciesdirect.com
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