A choppy start to 2008 as the AUD shows more volatility

The New Year started where 2007 left off; more volatility in an increasingly uncertain market. Starting 2008 at around the 2.28 levels, the Australian Dollar continued to benefit from a weaker pound and the rates fell to just under $2.17, levels not seen for over 10 years! Only a year ago it was trading at over $2.50 to the pound, but ignoring an uncharacteristic move in August, it has been on a progressive march downwards ever since.

We did see a brief correction in this downward movement, as investors took some of their profits from the so called “carry trades” and this pushed the rates back up to around the 2.28 levels again. However, there was more strong data out from Australia in January, with low unemployment, strong inflationary data and very bullish housing and retail figures and thus these gains were short lived. As expected, the Dollar strengthened in the last week of January, finishing the month at around 2.18 – 2.19.

So how low can it go? Unfortunately this is difficult to say given the current conditions, an answer that I appreciate has been given for the last few months. The UK is looking at a possible rate cut in February in a bid to calm fears that the UK will follow the plight of the US. The RBA, however, may need to raise their interest rates in an effort to contain inflationary pressures and control their booming economy. This may well be a continuing trend until they can see domestic demand starting to suffer under the weight of a creaking global economy.

The moves we are seeing illustrate just how the markets can react and what a risky business buying and selling currency can be without the proper planning. It can be such a difficult decision deciding when to buy your currency, and whether to leave it in the UK hoping that the rate will improve, especially when it is your life savings. There are, however, ways in which to considerably reduce this risk.

The key is to address your exposure from the outset and get a strategy in place that suits you. One popular option is what is known as a forward contract, or ‘buy now pay later’ method, whereby you can lock into a rate of exchange with just a 10% deposit, for delivery up to 2 years in the future. If you had locked in at the beginning of January 07, you would have achieved around the 2.50 mark. In ’08 that figure would have been about 2.27, a massive 23 cent difference, or $56,000 on £200,000! Put into perspective, that is your new house furnishings or even a very nice new car. Even if you take the difference in January of 11 cents, that would be a potential saving, or loss, of $22,000 on that £200,000….in just one month!

The forward contract holds many benefits; you do not need all of your funds available (the majority of peoples funds are tied up in property for example), it gives you peace of mind knowing you have secured a rate and know what you are going to achieve, and it is flexible and can accommodate changes in the time scale originally agreed due to house sales falling through, etcetera.

Of course, it is always tempting to wait for a better rate and only you can decide how much of your wealth you want to expose to risk (you may decide to fix an exchange rate for half or all of your assets). For those of you willing to take a bit of a gamble, you can take out a “market order” or target rate, which is where you set a level at which you want to buy your currency. If and when this level is reached, the money is bought, but obviously it holds the risk that your target won’t be achieved so you will simply have to buy at the prevailing rate on the day.

Some people may not have the money available to them for a forward contract. The UK housing market is currently experiencing a slow down, with houses taking longer to sell, so many people will leave the majority of their funds in the UK. HiFX have an office in Sydney, which is fully ASIC regulated, and an account can be set up with them before you leave the UK making the transition as smooth as possible.

For those of you who are leaving for Australia over the coming months, forward planning is of the utmost importance and could save you thousands of pounds to start your new life. For a free, no obligation consultation about your situation and the options available please contact the migration team at HiFX on +44 (0) 1753 859159, or email migration@hifx.co.uk.
 

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