Foreign Currency Exchange

Last week the Euro strengthened against the Pound following hawkish ECB comments.

ECB Executive Board member and head of Germany’s Bundesbank Axel Weber said that talk of rate cuts by the ECB is premature amid inflation and that rates could even rise. These hawkish comments saw the Euro strengthen against most of the major currencies. ECB vice president Lucas Papademos echoed these thoughts and mentioned that further rate rises could be needed if high inflation sparked a wage spiral in the euro zone.

Although these comments were made, German Inflation in August slowed by more than expected and the German Business Climate Index (IFO) slipped from 97.5 in July to 94.8 in August, much worse than expected, confirming that the economy is teetering on the edge of a technical recession, defined as two consecutive quarters of negative growth. All of this data suggests that the ECB are likely to cut rates towards the end of this year and it is believed that the hawkish comments by ECB policymakers were purely to deter the market pricing in multiple rate cuts.

Last week the Euro’s movements were largely dominated by hawkish ECB comments. However, for the week ahead, mere data analysis will be replaced by the universal driver - interest rates. The ECB is scheduled to deliver its decision on Thursday and it will come as no surprise that the general market and economist consensus is calling for no change to the benchmark lending rate. However, considering the data that has been released last week, there is a good possibility that Trichet will have to use different terminology at the press conference following the official decision.

As for the cross, outlooks for both the UK and the Eurozone economies look bleak. Therefore, it is expected that the cross may remain between 1.23 and 1.26 in the short term.

Sterling has fallen against the dollar to its lowest level in more than two years following comments by Britain's finance minister highlighting the UK economy's weakness. Chancellor of the Exchequer Alistair Darling told the Guardian newspaper on Saturday that Britain's economic downturn might turn out to be the worst for 60 years.

The dollar has risen to an eight-month high against a trade-weighted basket of currencies. While many investors had predicted that we would see some form of recovery against it, it is looking increasingly unlikely. "Certainly no one's rushing to buy cable at the moment," said Gerrard Katz, head of North Asia FX trading at Standard Chartered in Hong Kong. "There was a lot of weekend press about how bad the UK economy is at the moment, so that's weighing on the market.

The only ray of hope for those with a keen eye on Cable, though far from sentimental, is that with Hurricane Gustav forcing the evacuation of New Orleans and a number of off-shore oil rigs, it looks likely that in the short term oil prices will regain some of the ground lost recently. This could be negative for the USD and it is possible that the market will spike back in favour of Sterling. If this does occur it is likely that the gains will be short-lived so be sure to stay in regular contact with your account manger who will explain the benefits of Limit orders in this situation.

Last week the Dollar faired turbulently with a selection of interesting data and reports on the currency.

Further disappointing news for the US came when ‘Barrons’, a financial news provider, said the Government may have no choice but to nationalise the two huge US mortgage companies, Fannie Mae and Freddie Mac. This would effectively wipe out share holder equity in the company resulting in massive losses for investors of the two companies. Following the news, Kenneth Rogoff, former Chief IMF economist said the worst of the credit crisis is yet to come predicting more US banks to fail within the next few months. This represents a huge blow for the US and world economy as recently there were murmurs that the US economy was starting to emerge the other side of the credit crisis.
However the US Dollar pushed back up against the Pound early on Monday off the back of surprisingly poor German economic data which swung the Bank of England's trade-weighted Sterling index (overall buying power of Sterling against all currencies) to its lowest level since 1996, which in turn followed a steep fall in 'cable' to a two-year low just above the 1.83 interbank level. This means that within just a 3 month period the pound have fallen over 9% against the Dollar.

Despite the immediate gains seen on Tuesday, the Dollar is still very unsettled which is evident through weak employment data and home building numbers. However, with a sharp deterioration in other key economies including the UK the Dollar is expected to remain strong on the GBP/USD cross and continue strengthening.

This week is a historic one for the Eurozone, as the economy contracted for the first time since records for the single currency began in 1995. One of the European Central Bank’s executive board members, Lorenzo Bini Smaghi, has said growth in the European economy is slowing a lot faster than forecast.

Confidence in the Eurozone has also been affected by news from Spain, where inflation levels are the highest in the Eurozone and it’s having one if its biggest property price collapses ever.

Data such as the PMI and Sentiment surveys in recent weeks have pointed to weaker growth during the second half of the year. Indicating that the ECB are likely to cut rates before the end of the year or in Q1 of 2009. The minutes from the MPC meeting in August are due to be released on Wednesday and will be an important indicator for future interest rate expectations, as underlying pressure for lower rates continues to increase in the UK. As for the GBP/EUR cross, both the UK and Eurozone economy, are looking bleak and this will weigh heavily on both economies. It is expected that trading will remain between 1.235 and 1.28 in the short term, although all eyes will be watching for the interest rate decisions from both the Eurozone and the UK.

Dollar strength! Now there’s something we haven’t said for a while. Last week was the strongest for the Greenback since early 2004 with EURUSD dropping from 1.5631 to 1.5050 this morning and lows of 1.4928, and Cable has dropped over 3% with a high last Monday of 1.9835, compared to a low early this morning of 1.9138.

The FED, BoE and ECB all kept rates on hold as expected last week, with many analysts expecting that the next moves in the UK and Europe will be cuts. The Dollar was well supported by oil dropping to below $115 a barrel, helping to reduce inflation concerns but with the current conflict in Georgia we could see this creep back up due to supply concerns. We also saw better than expected home sales data, consumer spending and new factory orders for June, all helping to boost the Greenback. The Pound also suffered due to consumer confidence falling to another record low and major UK banks reporting falls in profits, and even losses in the case of RBS, due to the credit crunch. HSBC reported a 28% fall for the first half of 2008, Barclays announced another £2billion write-down, and RBS reported a write-down of £5.9billion and a first half loss of £691million, its first ever!

With the outlooks for both the UK and Eurozone economies worsening the days of 2 dollars to the pound look to be over. The key release this week is US retail sales on Wednesday where markets expect to see a slight rise, helping to maintain a strong dollar but with a hawkish MPC inflation report expected from the UK the same day, we should see a less volatile week for Cable with the rate remaining range bound between 1.89 and 1.9435.

The European Central Bank (ECB) raised interest rates yesterday from 4% to 4.25%, its first move since June 2007. The GBP/EUR Interbank rate fell to 1.2520 immediately after the announcement, just two cents over its all-time low.

Since the ECB is mandated to maintain price stability this decision came as little surprise. Data earlier this week showed that inflation in the Euro zone economy had reached an annual rate of 4%, double the upper limit of the central bank's target and the highest figure since records started in 1996.

Prior to the announcement the market had already fully factored in not only this move, but also a further interest rate hike to 4.5% by the year end. These expectations were dampened slightly in the later press conference, with ECB President Trichet noting the continued risks to economic growth and reinforcing expectations that the bank will not look to tighten policy further in the near term given the growth outlook.

The UK currency weakened to lows of around 1.25 against the Euro after the UK data, but regained ground following the ECB press conference. Increased unease over the European outlook will continue to provide some degree of protection to Sterling.

If you have ever exchanged currency you will know that rates fluctuate every second and the rate you see in the morning may not be the same rate later in the day. Many businesses, holiday makers and property buyers can feel left out in the cold when dealing with small currency exchanges and local banks. To save yourself time and money we have listed our top ten tips to save you from overpriced currency exchange.

1. If you know that you will be exchanging Sterling or another currency on a regular basis open an account with a foreign exchange specialist as they will obtain you better rates than you can find on the high street.
2. Make sure you do not pay to open an account with your foreign exchange specialist and understand that you are under no obligation to use it.
3. Whether for business or personal use, you can lock into exchange rates for up to 2 years into the future, helping with budgeting for either suppliers or property purchases.
4. Ensure you deal with a dedicated Account Manager, you don’t want to be listening to music on the telephone all day!
5. Make sure transactions are supported with a banking Receipt - Proof of Payment (POP)
6. You should not have to pay any fees or commissions with a foreign exchange specialist, again saving you money against the banks.
7. Transfer costs are cheaper than the banks. Generally speaking you will pay £20-£40 with a bank as opposed to £0-£20 with a foreign exchange specialist.
8. Take advantage of a Regular Payment Plan if sending money on a regular basis. Transfer costs will be cheaper and the rate will also be better than you will find elsewhere.
9. Transfers sent by a foreign currency specialist are sent via SWIFT, the quickest way of sending money in the currency markets. Thus ensuring your funds arrive quickly.
10. Using a foreign currency specialist means that you will have someone working for you, watching the markets and most of all, making sure you make the most of your money!

If you are looking to exchange large sums of money from pounds into euros over a broad timescale, as you would when buying your overseas property think about ways to get the best deal and protect your money against exchange rate fluctuations.

There are two ways of securing yourself the best exchange rate within your timescale:

1)     Buying Spot – The Spot Contract is the most basic and popular foreign exchange product. It is an agreement to buy or sell one currency in exchange for another. You have 2 days to settle the contract, at a price based on the prevailing "spot exchange rate" the current value of one currency compared to another.
Although the spot market lets you buy or sell currency as you need it, spot exchange rate movements are highly unpredictable, even during a single trading day. Upon receipt of cleared funds currency is available for onward transmission.
Or you may feel that you would like to leave what money you have in your domestic account to accumulate interest and only change your money just before the signing of contracts- this can be risky, however, as the Euro and pound fluctuate in value leaving the final price in pounds uncertain.

It is strange to find that purchasers of property in Europe are always keen to negotiate a good price on the house of their dreams, but then fail to appreciate that great savings can be made by ensuring that they receive the best exchange rate form Sterling to euros or visa versa. When buying abroad, you’ll usually have to pay a deposit, staged payments and/or the full purchase price. During this process, you’ll be required to convert your British Pounds to the currency of the country you’re buying in.

Since the exchange process is simply one tiny aspect of the entire transaction, many buyers fail to give it the attention it deserves and therefore make a fundamental mistake.

Most buyers understand that the price of currency fluctuates second by second, and they also realise that banks add on a 2-5% profit margin when selling the currency to you!

HOWEVER what many buyers do NOT realise is that there are ways to purchase currency at a much better rate, by buying at the right place and the right time. To save £1,000’s on your currency exchange and transfer charges; call a Currency Exchange Specialist, rather than using your high street bank!