How low will Sterling fall?
Since the end of December there has been the real possibility of Sterling going as low as €1.20. It has not reached that level yet, equally it has shown no sign that the target is unachievable. Sterling/Euro has fallen by 15% since Adam Applegarth became a household name and it could lose another 5% while Northern Rock ties up the loose ends of his golden parachute. If Mr Applegarth plans to spend his retirement in a villa by the Med, what should he be doing with his nest egg?
Buying Euro currency
Had he realised how serious things would become he could have bought his Euros in summer, before he had to go cap-in-hand to the Bank of England. He would have received €1.48 for every Pound and very swiftly would have fallen foul of the Financial Services Authority for insider trading. So that was not an option. |
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Sterling/Euro currency exchange rate got worse through November and December
It would have been reasonable for him to buy Euros in November when he tendered his resignation. He would have done his trade at €1.40 but he was probably far too busy to bother with such things at that time. His next opportunity came in mid-December when he left the bank. There could by then be no question of a conflict of interest and he would have picked up his Euros at €1.39, but you know how much there is to do in the run-up to Christmas.
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Sterling trading at €1.26 by the end of last month
He would have had a reminder in February when the Treasury decided to nationalise Northern Rock but Sterling was down to €1.33 by then and the Euros were looking expensive. By the end of March, when the size of his £760,000 pay-off was notified, Sterling/Euro was trading at €1.26. Good grief! What would have been worth €1.124 million was now down to €958,000. So, back to the original question, what should he be doing now?
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Have French property buyers missed the boat?
It's a dilemma, for sure. For seven months the Pound has gone only one way: Down. It is equally clear that anyone who should have bought Euros last autumn, and who has not yet done so, has missed the boat. Yet if they still need those Euros for a purchase in France this year they have to do something. Spinning the prayer wheel might work but is not a foolproof strategy. Is there any light at the end of the tunnel? Has Sterling fallen beyond what is reasonable?
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A big currency exchange rate move
The answer is probably yes. Big exchange rate moves, and this is a big one, are almost always over-extended. They go too far because investors are as reluctant as anyone else to face down a runaway truck. It is far easier, and far safer, to go with the flow even if you don't truly believe it should be happening. There is a sensation that Sterling has reached such a position. It is going down because it's going down. Illogical maybe, but it happens often enough. And it has probably not finished yet. That €1.20 target is obvious to the greenest technical analysts and the market may not be satisfied until it has been fulfilled. Indeed if Sterling rallies before touching €1.20 the sustainability of the rally will be suspect. The other boot needs to drop.
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Pound may retrace half the distance it has fallen
Assuming (always a dangerous exercise) that Sterling/Euro meets its target, the prognosis thereafter is still not over laden with joy. The most realistic projection would be for the Pound to retrace half the distance it has fallen. That would put it back in the mid 1.30s. Unless the large scale economic relationships change there is little chance that we will see the Pound anywhere near last summer's levels for a long time.
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Buying Euro currency for peace of mind
So it's make up your mind time. Buy your Euros now and be certain how many Pounds they will cost. Or wait for the drop and hope for the bounce; if the theory is borne out it will mean a saving of 5% - 8% compared to current exchange rates. (Currency Exchange - Buying Euros at the Best Rates - Your FAQs.)
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Find currency brokers to set up a forward transaction
Thankfully there is a third way. Buy half of them now. If Sterling subsequently rallies to €1.35 you can be grateful for the saving. If it falls further and fails to retrace then at least half the money has been taken care of. Use a currency broker (Advantages of using a currency broker or foreign exchange specialist) and do the transaction for "forward" (deferred) settlement and you can fix the exchange rate for a percentage deposit. Only when settlement day arrives must you hand over the Sterling balance. (Currency exchange options which save you money.)
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Currency exchange advice - helping French property buyers hedge the risk
Sterling has had a tough half year, not always for the best of reasons. It could fall further, to the lows of 1995, but if it does it can be expected to retrace part of its downward path. Hedge the risk by buying half your Euros forward and aim to cover the remainder in the mid 1.30s. Now where's that prayer wheel?
Additional articles which may be of interest:
Feedback on currency brokers or foreign exchange dealers
Glossary of terms used in currency exchange
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About the author
The information in this article has been supplied by the currency broker Moneycorp. For further advice on currency exchange and money markets, call Moneycorp today on +44 (0)20 7589 3000. Alternatively go to www.moneycorp.com where you can open a free, no obligation Trading Facility. Make your money go further!
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