We asked for your questions on how to protect your wealth abroad in the face of a weakening pound.
Mark Bodega, director at foreign exchange specialists HiFX, has answered your questions. His answers provide an informative account of the prospects for the pound in the coming months, explaining what headwinds sterling faces (you can also click here to see graphs courtesy of HiFX on the pound’s movements against the euro, US and Australian dollar over the past decade).
Mark Gordon and others asked about the prospects for the pound against the Australian dollar
Bodega answers: You’ll find it very hard to get long term views on any currency as they are generally meaningless, especially in the current climate of extreme market volatility experienced over the last 12-24 months.
Over the past year, Sterling has been incredibly weak against all its major counterparts amid concerns about the state of the UK economy. Increasing levels of debt coupled with a high dependency on the fragile financial services sector has undermined confidence in the Pound.
Whilst the Australian Dollar has also been very volatile, rising commodity prices coupled with the belief that the Australian economy is better placed to withstand the global turmoil has kept the currency relatively strong.
With the Royal Bank of Australia (RBA) bolting out of the starting blocks ahead of other world economies and increasing interest rates again on the 1st of December 2009 to 3.75%, the Dollar’s allure as a source of higher yield is increasing month on month.
Let’s face it, having your life’s savings sitting in an account earning very little, if anything, is hugely frustrating and the same applies for large institutions and banks, hence the permanent demand to buy Aussie Dollars and accordingly in line with the basic economic principle of supply and demand, as soon as there is a high demand to buy a currency, the value of that currency will climb.
As to where to from here for Aussie interest rates, in a recent report 13 out of 18 analysts polled by a major news feed said the RBA will increase interest rates by another 0.25% on the 2nd of February 2010
The second factor supporting the Aussie Dollar and all other commodity based currencies is the record breaking gold price we are currently experiencing. With a 40% year on year increase in the price of a fine ounce of gold and the demand for metals in general out of China picking up again, it can come as no surprise that a gold rich economy like Australia has weathered the world downturn much better than service rich economies like the UK. And, a strong economy will often lead to a strong currency.
Going forward, many analysts believe Sterling is still undervalued despite recent signs of recovery. Remember GBP/AUD has recently hit a 25 year low. In contrast, they believe the Australian Dollar is in overbought territory and looking vulnerable to a correction.
Looking ahead over the next 6 and 12 months with GBP/AUD in mind, forecasts from Barclays seem to say that by mid year, we will be around 1.77 and by the end of 2010 the rate should have climbed to 1.88.I suppose these are just one institution’s opinions and so should be taken in that context.
If you are worried about further sterling depreciation, you might want to consider transferring some of the money now and some later. If you look back at the exchange rates, now is certainly a good time to be transferring Aussie Dollars back to the UK as the rates haven’t been this good for many years. That doesn’t mean to say sterling could not appreciate further, but that’s a decision you need to make on risk versus reward.
For anybody sitting on cheap Dollars (traded above 2.20) unsure about whether or not to bring them back into Sterling, a college professor of mine used to say, ‘you cannot make a loss taking a profit’. This is assuming you have a need to have them back in GBP or you have a long time to wait – if need be – to get the funds back into AUD.
Steve Hayes asks if an incoming Conservative party would likely let the pound’s value sink to help reduce the debt burden
Bodega answers: In 2010 the debate will focus on the impact of actions taken by Central Banks and Governments, coupled with the sustainability of economic recovery. For Sterling’s sake, a General Election will determine who holds the reins to the UK’s recovery, but reducing debt needs to be high on the campaign agenda to keep the UK’s credit-rating strong. Global risk appetite will again be a critical factor influencing exchange rates and the potential for raising interest rates could also become a decisive factor.
A currency’s value will also be determined by the health of its economy; a thriving economy will typically attract more investment and capital inflows and export more goods. To invest, or to purchase a country’s goods and services, investors and consumers will need to purchase that country’s currency, causing the currency to appreciate. With many countries having exited recession in the third quarter of 2009, the focus is now on the comparative rate and sustainability of that recovery.
As stated in a previous answer, Sterling has been incredibly weak against all its major counterparts amid concerns about the state of the UK economy. Increasing levels of debt coupled with a high dependency on the fragile financial services sector has undermined confidence in the Pound.
So how would a Tory government affect Sterling’s prospects this year? As ever, there will be a huge amount of factors that will determine the movement of Sterling this year such as how much the economy recovers, whether interest rates can be increased and if quantitative easing is reversed. But Sterling will largely be driven by market confidence about the debt being repaid there are concerns over our sovereign debt rating being cut making it more difficult and expensive for the UK government to borrow.
Were the Conservatives to win the next election, as many political pundits predict, the test for the Tories will be whether or not they will put the country’s finances before the country’s public services. Will they risk the unpopular but necessary cuts in public spending and services to be able to show the markets they are serious about reduce the debt, without derailing an expected sluggish recovery? They certainly talk a good game and seem to take the risk of a ratings downgrade on our sovereign debt more seriously than the current residents of 10 and 11 Downing Street.
Even if the ratings agencies weren’t to cut our rating, markets are free to choose whether or not to buy our debt. If they choose not to, we will have to offer higher interest rates to sell it, increasing the funding costs of our debt more making it harder to pay down the debt.
To sum up, Sterling’s fate will largely be in the hands of whoever wins the election. The Tories are likely viewed the better candidate to deal with the debt, but only time will tell if they are willing to put our money where their mouth is!
Marketman says: If you already have overseas assets and sterling weakens then what is the problem? I have a friend who sold a property in Tuscany for a loss in euros but once he had repatriated the money because of the lower rate for sterling against the euro, actually ended up with a small profit. On the other hand if someone has a pension here in sterling and lives say in Spain and the money is converted into euros then there is a problem as they receive less euros for their pound.
Bodega answers: You are absolutely correct. There are always two sides to the exchange rate. Rates that are bad for some, are good for others in equal measure. For example, the average income for British pensions overseas has fallen by around €270 (£242) since January 2007 and with one million Brits claiming the state pension abroad, the rise in the value of the Euro against the Pound has had a major impact on the spending power of those retired in the Eurozone. Brits living in Europe and receiving a fixed income in sterling are being hit particularly hard. In the past two years, we have seen unprecedented volatility in the currency markets with the value of sterling fluctuating by over 30% against the euro.
Whilst the Eurozone pensioners have suffered, their counterparts in South Africa, New Zealand and Australia have all seen the domestic value of their British state pension hit even harder by market volatility.
New Zealand-based pensioners from the UK have lost NZ$226 (£100) a month, while those in the USA have lost US$56.52 (£34.18) and in Europe, they have lost €56.52 (£50.72).
Against this background, it's no surprise that a group of 13 pensioners who have moved abroad want their UK State pensions to be inflation-proofed and have taken their case to the European Court of Human Rights.
On the flip side of the coin, people like your friends who managed to sell their property in Tuscany have seen the value of their international assets in the Eurozone increase in value by over 30% despite the economic turmoil, purely off the back of exchange rate movements. As a result of this Sterling weakness, we’ve seen the numbers of people selling assets and transferring the money back to the UK either to pay of debts or for the use for UK based investments increase by almost 130% in the last 12 months. British sellers of international property should therefore remember that with far less buyers in the market, they can afford to drop the price of their property quite significantly and still achieve the Sterling amount they had hoped to achieve through the sale.
Rob Bruce and others asked what accounts are available to invest in foreign currencies that allow easy withdrawal access whilst overseas.
Bodega answers: The exact details of relevant bank accounts change regularly, but hopefully the following information is useful. As I said, I would check with any relevant providers what I’ve outlined below is up to date, but the main points should remain constant.
A number of banks offer foreign currency accounts. They all work in different ways and most importantly let you transfer to different countries. As you haven’t said which bank you’re with, I’ll touch on all the main ones.
There is one major point of difference though... one set allow you to send money to anyone who holds an account with the same bank overseas, while the other set require both the UK and the foreign account to be in YOUR name.
A good source of information around international bank accounts is www.Moneysavingexpert.com where I got the information below from:
Citibank has a fees free transfer service which usually has an OK exchange rate. In addition, your money will usually arrive in the relevant account within five minutes. It works for 23 mainstream countries including the US, India, China, Germany and Australia (see their website for a full list).
According to MSE the account is called the Citibank Access Account which unlike some of its other accounts has no monthly fee. Last time I checked, the interest rates offered weren’t particularly good, but it could be worth grabbing one just for overseas payments and moving money into it from your normal account.
You’ll then need to ask the recipient to open a Citibank account in their home country, though not all countries have fee free banking as in the UK. It’s also worth checking the exchange rate when converting anything except Euro to Dollar (and vice versa), as rates can deteriorate.
A number of banks also have relationships that allow you to send money without a fee at OK exchange rates. However, both the UK account, and the one in the country you are sending to need to be in your name. This means it's useful if you have a second home abroad and need to pay bills, but much less so for sending cash to friends and family.
To Spain. A number of banks offer this service for Spain due to the number of expats there. Halifax or Bank of Scotland offer transfers to Banco Halifax Hispania accounts. Lloyds TSB transfers to Lloyds TSB Spain accounts. Barclays transfers to Barclays in Spain (if over £500 for a regular payment or over £1,000 for a one-off payment).
To France and Italy. Barclays transfers to Barclays in France or Italy (if over £500 for a regular payment or over £1,000 for a one-off payment).
US, Australia and Hong Kong and more. HSBC offers fee free transfers to 41 countries, but you need its Premier Bank Account (which means you need £50k savings or a £250k mortgage with HSBC, or £75k salary going into an HSBC account), so it’s not worth it unless you make a lot of transfers.
With all of the above, it’s worth comparing the exchange rates offered and the bank charges levied with those of a foreign exchange specialist. Obviously it depends upon the amounts being transferred, the frequency and of course the currency pairs themselves, but in most cases it pays to simply open an account with a bank in the destination country and make the international money transfer via a broker as they will offer better exchange rates and no bank charges, so it’s well worth checking before signing up for one of the accounts above.
Some currency providers, including HiFX, offer an online international money transfer service which enables you to get discounted exchange rates for amounts of £250 up to £50,000 with no need to call your bank.
To visit site click here.
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