Foreign exchange - it's all the same isn't it? There's no point shopping around. My bank will keep it simple for me and offer me a good currency exchange rate!
When moving abroad, it is likely that you will be sending a sizeable amount of money to your new home. Your currency exchange will be a vital step for you and using a currency convertor will tell you roughly how much you can expect to receive.
The rate at which your currency conversion takes place can be important. Why is it, therefore, that the amount you expect to get seems to be so different to the amounts actually quoted by your bank?
Of course, you want the best foreign exchange rates but it can be difficult to understand why they vary so much.
With so many banks and foreign exchange brokers to choose from, who all offer you excellent service and promise to give you a competitive rate, how do you know which one to trust; which one really will give you competitive foreign exchange rates?
Suddenly, the comfort of dealing with your existing bank can seem like an attractive option!
This Emigration Store Guide to Foreign Exchange will guide you through the decision making process to help you make a better decision. In the end, the more you understand, the more you will save.
If you are planning on transferring say £100,000, maybe a saving of several thousand pounds could come in handy to help pay for the costs of moving or your settling in costs?
Unless you want to begin actively trading currencies, what you really want are transparent answers to the following questions.
How much will it cost me to change my Sterling into my chosen currency?
How long will it take to change?
Is there a way to know now what exchange rate I can get at some time in the future?
How should I choose the best bank or currency broker to make the transfer for me?
Spot, Forward, Margin, Inter-bank, Bid-offer, Best Execution, Cross-rate, Cross-currency swap, Currency pair, Currency swap, Hedge, Inter-dealer broker, Liquidity - these are some of the common terms used in the foreign exchange market. They can sound a bit daunting but it is useful to understand some of the terms as it will help you understand what you want to achieve when you exchange your sterling but also to maximise the rate you get.
Some of the most useful terms for you to know are:
When exchanging one currency into another in the shortest, standard amount of time (usually 2 days), the rate at which this deal is struck is called the spot rate. This rate is the most important rate in the currency markets because pretty much every market transaction uses this as a base for the calculation.
The forward rate for the currency is very useful if you want to lock in a rate now but actually exchange at some time in the future.
For example, if you have your Sterling available to exchange today but you want to ensure that you can get the current rate in the future, as you don't want to take the risk that the currency rate (spot rate) will move (you may have agreed a house purchase for example and want to "lock in" the sterling amount you have to pay), then you can make a forward purchase of the currency you want against Sterling.
This can generally settle at an agreed time up to one year in the future.
Usually a broker or bank will require that you deposit a percentage of the transaction with them to lock in the rate. N.B. the forward rate will differ from the spot rate by an adjustment for the difference in the interest rate of each currency.
This makes sense because if the deposit interest rates are higher in Sterling than in the currency you are buying in the future, you will earn more interest by retaining the sterling from now until the agreed date of exchange. It can, of course, work the other way as well.
The foreign exchange market, like other financial markets has two prices. One is the price you can sell at (bid) and one is the price you can buy at (offer).
N.B. Remember it is the bank or broker who makes the quote so their 'bid' is what price they will buy something from you and their 'offer' is what they will sell something to you.
It's not hard to work out which is which – it will always cost you more to buy something than you can get selling something! The difference, or spread, is the amount that the broker or bank makes from the trade.
In the main foreign market, where the volumes traded can run into the trillions of dollars per day, the bid-offer spread is tiny. In the retail currency markets, where individuals don't have access to the main market rate, you are forced to use either your bank or a foreign exchange broker. In this instance, it can be quite large, meaning the banks are making a significant profit at your expense.
Where the bid-offer spread makes a difference is when individuals want to change relatively small amounts of money. By charging a wider bid-offer spread, the banks or brokers can make more money on each trade.
The high street banks have traditionally charged the highest bid-offer spread for private customer transfers and this provided an opportunity for foreign exchange brokers to enter the market and, with a lower cost base, to be able to offer 'better' rates, or tighter bid-offer spreads.
This is the key point to remember – the difference between the main forex market quote i.e. the spot rate that the bank will actually buy/sell at in the market and the rate you are quoted is how much profit the broker or bank makes on trading with you.
It may not be obvious but each currency pair e.g. Sterling and the US Dollar or Sterling and the Australian Dollar can have quite different amounts traded globally in the currency markets each day. The less frequently a pair is traded, the lower the 'liquidity' which basically means that
i) it can be harder to find brokers/banks to trade with (though this only really applies to the more unusual currencies)
ii) lower volumes can usually be traded easily (again in the main forex markets) and
iii) that the bid-offer spread is wider
It should be noted that, unless you need to buy what is usually called an 'exotic' currency i.e. a very infrequently traded currency, liquidity will generally make very little difference for an individual.
Shopping around can make sure you get the best possible deal. The Emigration Store has done some analysis of the marketplace to help you understand how to get a better deal.
Currency Exchange Rate Analysis or 'how it can make a surprisingly big difference who you trade with'
Using an example of selling £100,000 into Australian dollars across a mix of foreign brokers and high street banks, it can be seen that there is a considerable difference which can end up costing you / saving you thousands.
Using a well-known foreign exchange comparison site and a number of high street banks own websites, a range of brokers and banks was analysed.
N.B. It should be noted that these are indicative rates only and may not be fully representative of the actual rates you may get. It is meant to show a broad comparison and illustrate how important it is to seek a reliable, competitive partner.
Range of quotes:
Across the foreign exchange brokers, there was a difference of A$900.
Across the foreign exchange brokers who state they use Barclays (one of the biggest foreign exchange banks in the world) as their main counterparty, there was a difference of A$360.
From the 'worst' quote on a bank website to the 'best' quote from a foreign exchange broker, there was a whopping A$8,180 difference, which is over 4%.
Impact of volatile Foreign Exchange rates
Do foreign exchange rates move to such a degree that they can really make a difference in the long term? Below are monthly exchange rate charts for the currencies of three of the most popular countries to emigrate to.
Source: European Central Bank
Using just the end-of-month rates (the actual difference will have been greater using daily data as the highs and lows of the exchange rate will have occurred intra-month), the difference in what you would have got for exchanging £100k can be seen in the table below. N.B. the difference is shown in the local currency.
It is impossible to predict the highs and lows of currency markets as your need to transact is almost certainly likely to occur within a relatively short period of time. However, taking the advice of a professional can help you maximise the amount you can receive at any given point in time.
The Emigration Store Currency Exchange Preferred Partner
It is, of course, entirely sensible for you to research the market and make up your own mind about which bank or currency exchange broker makes you feel the most comfortable.
Whilst the actual rate you get is one of the main considerations¹, it is also important to find a company that has a solid reputation and considerable experience of transacting and processing foreign exchange deals.
Customer service is also vital; if you are transferring a large sum of money you want to deal with a company that will help you reach the decision which is right for you, and will provide high levels of friendly expertise. Above all, you want someone who can talk your language and help you understand the process to your satisfaction.
The Emigration store has partnered with on the basis of their consistently competitive exchange rates, high levels of professionalism and knowledgeable customer service.
¹ it should be borne in mind that exchange rates can fluctuate second by second and obtaining the very best rate possible, at the very second you want to trade, is almost impossible unless you are professionally trading in the institutional foreign exchange markets.