What approaches can minimise the impact of foreign exchange fluctuations on wealth that’s spread across multiple currencies?

Uncertainty is the enemy of investors and savers everywhere — and those who manage their finances across multiple currencies know only too well that the uncertainty of fluctuating exchange rates can seriously damage their wealth.

When financial affairs span euros, sterling, dollars or other currencies, even seemingly small rises or falls in rates can add hundreds, if not thousands, to bills paid in one currency when income is generated in another. Over the nine weeks to the end of March 2013, for example, the value of sterling oscillated by 2.6 per cent against the euro – in four separate waves. Over the same period, sterling lost a hefty 4.3 per cent against the dollar, yet it came out even against the South African rand.

The stakes don’t have to be that high or unpredictable, however: there are plenty of shrewd ways of managing internationally-spread money that can protect against dramatic swings in currency markets – and even create an upside to such movements. Indeed, with savings rates in most economies around the world stuck in the low single digits, the activity of ensuring exposure to currency fluctuations is under control and not eating into capital can be as effective as searching high and low for a fractionally better savings rate.

Staging money movements

Critical to such activity is an ability to determine the specific point at which money is transferred between currencies.

“People are now much more switched on to the effect that currency movements can have on their money,” says David Pearce, vice president, FX specialist at Barclays International. “In the past, many people were only interested in foreign exchange when they went on holiday and found that things were costing them more than in previous years. But now that we are all operating in a global market, everyone has become more aware of movements in the world’s currencies and how such movements can affect us all.”

The opportunity to influence currency movements is, of course, beyond the influence of most investors, savers or borrowers. But anyone with a multinational financial profile ignores currency fluctuations at their peril.

Take the example of someone currently living in the Nigeria with savings and income in naira. If they are planning to buy a property in the UK in a year’s time when their son goes to university, then they know they will have a future liability in sterling – but their assets are almost exclusively in naira. If they do nothing and sterling rises dramatically against the naira over the year, then they might find the kind of apartment they had in mind has become too expensive, something that can put the whole project in jeopardy.

People are now much more switched on to the effect that currency movements can have on their money.

However, if they locked the money needed into sterling while in Nigeria then they would at least know that they had sufficient funds to acquire the property (factoring in property market prices movements and changes to personal circumstances, of course). In other words, they would be taking positive action to protect against potential currency movements by fixing into sterling at a level they know now and will be comfortable with when they receive it in the future.

As that illustrates, the point at which the move is made between currencies ¬is vital. By keeping a close eye on exchange rate movements (see High-visibility FX below) and, using a bank’s FX specialist, a trade can be made at the optimal time, with currency bought through a ‘spot contract’. (In the period given as an example above from early 2013, the pound actually fell by 4 per cent against the naira.)

Forward-thinking forex

But what if the current exchange rate is particularly appealing yet the liability is still some way off. The option then is to use a ‘forward contract’ – a common practice among people who want to move large sums of money for big purchases such as buying a property.

“Forward or spot contracts are ways of minimising risk and mitigating against exchange rate movements,” explains Pearce. “A forward is an obligation to exchange one currency for another at a pre-determined rate on a pre-determined date. There is no upfront cost for entering into the transaction. However, the client has no flexibility on the position: they must transact at the agreed rate on the agreed date, regardless of how the market has moved.”

He cites an example: “Let’s say you live outside the UK and want to buy a house there which, at current exchange rates, will cost you £250,000. If you have a low tolerance for risk, then you may want to buy a forward contract for £250,000. If you have some tolerance, then you might want to buy part of that sum rather than all, or do nothing in anticipation that your currency will strengthen against sterling over the period so that you pay less. It’s all about deciding how much market risk you are willing to undertake. I take the opinion that if you do nothing about currency movements then you are taking a view that currency fluctuations will not affect you.”

Whatever the approach, the rewards of getting it right can be very real. Someone taking a six-month forward contract at the start of August 2012, for example, to sell £100,000 into euros, when the rate was €1.28 to the pound, would get €128,000 when the contract closed at the start of February.

If they hadn’t taken that forward contract and in early February sold their £100,000 into euros, they would have only received around €115,000, as sterling's value had fallen steadily over the period. So by taking the forward (or indeed a spot) trade back in September, the gain would have been €13,000 – perhaps enough to make the difference between being able to complete a property transaction and falling short of funds.

Of course, forward contracts work the other way too. If, in early August 2012, someone took a six-month fix on the Australian dollar to sell £100,000 at a rate of A$1.47, then in early February 2013 they’d have received the guaranteed A$147,000. Had they not planned so carefully and simply bought a spot contract come February, then their £100,000 would have netted A$151,000, a A$4,000 benefit over the forward contract.

Nonetheless, most people don’t view forward contracts as an opportunity to speculate on currency movements; rather they see them as a means of delivering certainty. And in such volatile times, that is a highly valued commodity.

High-visibility FX

In the zero-sum game that is foreign currency exchange, perfect timing can mean the difference between painful losses and welcome gains. The edge for professional dealers comes from a bank of trading screens, fed with real-time price movements, number-crunching analysis and live news. Compared to that, private individuals with finances spread across different currencies may feel themselves at a distinct disadvantage. But less so now.

In recent years, increasingly sophisticated online FX tools have emerged that enable the detailed tracking of currency fluctuations – as they happen – ensuring those with internationally-spread finances can protect their interests or even react fast enough to turn market turbulence to their advantage.

One of the most advanced of those tools, iAlert, a free service available to clients of Barclays Wealth and Investment Management (and through a 60-day trial to others), enables users to track up to 75 currency pairs in real time, to compare current and historic rates, and, critically, to receive alerts (by email) when any pre-selected currency pairs reach upper and/or lower thresholds set by them. The upshot: customers are better equipped to know when to move – and hold – their funds to greatest effect.

With more of its international customers wanting such insight while on the move, in late 2012 Barclays extended iAlert’s reach beyond desktop PCs and laptops with a version optimised for smartphones and tablets, including Apple’s iPad and iPhone. Moreover, that upgrade included enhanced dashboard and chart options, plus the ability to personalise the service to individual needs. iAlert also provides direct access to a selection of Barclays FX research and market commentary from the bank’s Treasury Specialists.

As Shaun Phillips, managing director of Barclays Wealth International, highlights: “Few people have the time to watch currency rates as closely as they would like to. iAlert is a valuable, time-saving addition to our foreign exchange service, designed to enable clients to make more informed decisions.” And in today’s fast-moving currency markets, individuals with FX challenges need all the help they can get – digital or otherwise.

CASE STUDY: Multi-currency manoeuvres

When an individual’s finances and assets are spread across multiple countries, the foreign exchange considerations can be both complex and cumbersome. But by maintaining accounts denominated in multiple currencies, unnecessary currency switches can be minimised, for example by ensuring that most outgoings and incomings are made directly in a single currency.

Take the example of Justin, a UK national working in Silicon Valley for a US start-up. He owns a house in London and also has a holiday home in Italy, bought several years ago and let out most summers through a local agent. His salary and benefits are paid in US dollars, as are his stock options, but his mortgage and other charges on his UK house is in sterling. The income he receives from his Italian property is in euros and he also pays the local Italian agent to look after the tenants and property. He holds funds in dollars, euros and sterling in an offshore account (located in the Channel Island of Guernsey).

With liabilities and assets in sterling and euros, and earnings in dollars, Justin is very aware of his exposure to the risk of significant movements between the three currencies. If sterling weakens against the dollar while strengthening against the euro then he faces a mixture of good and bad news. His mortgage payments will become cheaper, relative to his US earnings, but he may be paying an opportunity cost by holding onto more euros than he needs.

He calculates that his total cash in different accounts is roughly divided half in dollars, 30 per cent in sterling and 20 per cent in euros. As he expects to return permanently to the UK within three years – and weighing the economic outlook for the US, UK and Eurozone – he decides, in consultation with specialists at his bank, to transfer a significant proportion of his euros into sterling, buying the currency on a spot contract. He also buys a forward contract to convert some of his dollars into euros for delivery in a year’s time with the aim of covering a planned renovation on his Italian house.