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7 signs that your currencyexchange rate is about to changedramatically

Currency is a high risk and volatile market, and exchange rates can move up or down

at any time. The reasons for this fluctuation could be real or speculative.

June 02nd, 2016 Author: Simon Birch RSS-Feed

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at any time. The reasons for this fluctuation could be real or speculative.

In simple terms, foreign exchange rates change because people’s perceptions change

about the goods or services they can get with various currencies. Basically it comes

down to supply and demand.

Here are some examples:

Inflation.

As an example if inflation is low, let’s say in the UK, then UK goods become cheaper

and exports become more competitive price-wise so there is an increase in demand

for pounds sterling to buy those UK goods. Additionally, foreign goods would then

appear less competitive to UK residents so they would stop buying them and hence

have less need for overseas currencies. So low inflation means the value of currency

increases but high inflation would mean a fall in value.

Interest Rates.

If a country’s interest rates rise, more investors will want to deposit money there as

they will get a better rate of return. Demand for that currency therefore increases

which means a better exchange rate.

A ‘hot money flow’ then occurs. This is when money is invested in an economy by a

foreign entity in order to obtain the highest short-term interest rates possible. There

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are substantial gains to be made by international investors moving money between

different countries in this way, having speculated about interest rates or expected

fluctuations in exchange rates.

As an example if the UK and EU both have an interest rate of 1% it does not make

much difference where your money is deposited. But if the EU interest rate suddenly

increased to 2% you would get a higher return from saving in an EU bank. So

investors would sell the pound sterling and buy euros in order to gain more interest.

This increase in demand for the euro will result in an appreciation in the value of the

euro against the pound.

Concern about a currency’s strength/future economy.

Best demonstrated by a real example:

In 2011 investors had concerns over the Eurozone difficulties so they needed to find an

alternative financial market. Interest rates in Switzerland were not particularly high

but the market was seen as a safe haven away from the EU markets. So there came

about a huge demand as many investors exchanged their euros for the Swiss franc

which then experienced a sudden increase in value against the euro. In turn the euro

experienced a hasty devaluation.

Recession.

During a recession interest rates tend to drop. In turn this makes a country lessConvert webpages or entire websites to PDF - Use PDFmyURL!

attractive to invest in and with this lack of confidence investors are more likely to

move their money overseas. The currency from the receding country will therefore

lose value i.e. depreciate.

On the flip side sometimes a recession means inflation rates go down which makes

the currency appear more attractive i.e. appreciate in value.

Global event.

A major global event such as the Olympics or a World Cup attracts huge interest from

spectators, sponsors and the media. Fans will arrive in their droves spending money

on accommodation, tickets, food, beverages, transport and memorabilia. Sponsors

will invest large sums in order to advertise their brands to a global audience. New

business relationships are also likely to be struck up which will strengthen

international trading. The media will showcase the hosting nation’s attributes which

will result in increased tourism.

Employment levels should also rise as many jobs will be generated in relation to

preparation for the event, during the event itself staff will be employed to ensure it

runs smoothly and to make it safe and enjoyable, plus additional tourism jobs may be

created during the subsequent period.

All of this means increased demand for that nation’s currency which will appreciate in

value.

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Unemployment.

Poor unemployment figures are likely to weaken the value of currency. An increase in

unemployment suggests a slowdown in the economy which reduces investor

confidence. Plus, if the unemployment figures are worse than expected the interest

rates are not likely to increase, in fact they may even be cut. So we can refer back to

previous paragraphs above and see that low interest rates and low confidence mean

a low demand for currency which results in a depreciation of the currency.

Additionally, the more unemployed people there are, the less ready cash there is to

spend on non-essential consumer goods and services. This reduced demand for goods

means a weaker currency value.

Balance of payments.

Also known as Trade Balance. The calculation is the total value of exports minus the

total value of imports. If exports outweigh imports the outcome is a favourable

balance, however if the answer is a negative this means the country has a trade

deficit. A favourable balance means money is coming into the country to purchase

the goods and services. The effect of this high demand increases the currency

value.The contrary position of course with a deficit (imports exceed exports) means

you are moving more of your domestic currency to foreign markets than you are

receiving so this could lead to devaluation. This deficit needs to be funded so foreign

markets lend money to finance the negative trade balance. At some point of course

the debt will need repaying so the country must find a way to make exports exceedConvert webpages or entire websites to PDF - Use PDFmyURL!

imports. One way to do this is to reduce the value of the currency making foreign

exports cheaper.

In conclusion a short term deficit will not have a great impact on a currency’s value

but as time goes on a long term deficit will contribute to a weakened currency value

while the economy adjusts to create the surplus needed to repay the debt.

What can you do to protect your currency against exchange ratefluctuations?

Talk to a currency transfer specialist.

A specialist cannot advise you of what future rates will be or when to buy currency

but they can give you the facts, such as trends from current and past historical data

and the latest market information, based upon which you can make an informed

decision.

Spot rates are when you make an immediate transfer from one currency to another

using the exchange rate for that given moment in time. A forward contract means

you can lock in an exchange rate. The rate will be quoted and traded today but is

available for delivery and payment at any given time over the next 12 months. You

can then be safe in the knowledge that when you need to transfer or exchange

currency during that period you know what rate you will get.

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You could also set up a rate alert. If there is no urgency to your currency transfer a

specialist may agree to tell you when the exchange rate between your desired

currencies hits a specified level. For example, let’s say you do not want to exchange

your pounds for euros until the exchange rate reaches 1.45 – just explain your wishes

to a specialist and they will monitor it for you.

About the Author

Simon BirchHead of Online Marketing

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