How watching currency markets could save you money
If your wealth is spread across multiple currencies then it pays to keep an eye on exchange rates. By using currency services, you could diversify your wealth and lower the risk of rates going against you when the time comes to spend your hard-earned cash.
The world’s currency markets can be very volatile places. For example, in the year to December 2013, the US dollar rose in value against the Japanese yen by about 21 per cent, while the South African Rand fell in value against the British pound by around 15 per cent. It therefore makes sense to keep an eye on exchange rates if your financial interests are spread internationally, and potentially to exchange one currency for another in order to reduce the risk to your overall wealth.
Holding cash or investments in more than one currency is a form of diversification. It reduces the risk to your overall wealth by ensuring you don’t “put all your eggs in one basket”. However, using currencies for investment purposes is a high-risk practice and one that should only ever form part of a broader investment strategy. The way you use currency services should be driven primarily by practical considerations: how to ensure you meet your financial obligations in the right currencies at the right times.
Staying alert: why it can pay to watch exchange rates closely
The following example is not real but is a typical story based on the real-life clients we help every day:
Mr Kruger is a South African logistics consultant working in the US, where he is being paid in US dollars. He has a house in Johannesburg that he intends to live in when he returns home, and he is paying a mortgage on this priced in South African rand. Mr Kruger usually converts dollars into rand twice a year to pay down his mortgage in two lump sums.
However, lets say that at the beginning of 2013, Mr Kruger decided to monitor the rand’s performance against the dollar, and make the currency conversion for his mortgage repayments on a monthly basis instead of every six months. The performance of the rand against the dollar in the first half of the year shows that Mr Kruger was right to do this: between January and June the rand declined against the dollar, making his mortgage repayments cheaper.
Of course, if he had got his prediction wrong, and the rand had strengthened against the dollar instead of weakening, Mr Kruger would have missed the opportunity to pay down his mortgage at the more favourable rate in January. As with all currency trading activity, whether you benefit depends on whether you get your predictions right, and you should always remember that, when entering into currency transactions, you can suffer losses.
Reducing currency risk over the long term
- Book an exchange rate in advance, if you are planning to exchange a fixed amount of currency at a fixed time in the future and you already have the necessary funds in your account; or
- Enter a contract to exchange a fixed amount of currency at an agreed rate, if you do not already have the funds in your account but you know when you wish the deal to take place, either on a specific date or between two dates in the future.
What Barclays offers and how it could help you manage your currency needs
For example, iAlert is a free online tool that makes it easy to monitor the information that matters to you:
- Track up to 80+ currency pairs in real time using an insightful, personalised dashboard
- Set upper and lower exchange rate thresholds for your chosen currencies
- Receive email alerts when any of the currencies you’re tracking hits your chosen exchange rate threshold
- Receive updates on the performance of your chosen currency pairs, scheduled at a frequency of your choice
- Stay informed and prepare for possible changes in currency value with access to our research and FX tutorials
- Access FX information wherever you go, so you can make informed currency exchanges at the most advantageous times – using the fully optimised iAlert for smartphones and tablets
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