Currency exchange movement
Given the lack of movement in the Sterling/Euro exchange rate recently it would be easy to be lulled into a false sense of security. Since February the Pound has remained almost exclusively within a four cent range between €1.46 and €1.50. During the last three months that range has narrowed by half a cent on both sides, despite a global panic that has decimated stock markets and sent currencies in all directions.
US sub prime mortgage industry affecting all
At the beginning of August there was concern that problems in the US sub prime mortgage industry could ricochet around the world. The Washington administration, including the President, stood up to tell everyone not to worry their pretty little heads with such nonsense. Then it all blew up. As usual in financial crises, it was a cocktail of factors that sparked it off. |
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Sub prime mortgages - the way they work
Sub prime mortgages have artificially low monthly payments during the introductory period. Then the payments shoot up. A lot of borrowers cannot afford the sharply increased repayments. Their houses are repossessed and put on the market, which, in the States, is suffering from oversupply and falling prices. Borrowers who had expected to refinance their mortgages after the introductory period, ended up in a negative equity situation and unable to do so.
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Debt packages risk spread among investors
The investment companies and banks which had funded the whole thing by buying the underlying debt realised that the collateralised debt obligations (CDOs) they held were worth less than they paid for them. But how much less? Nobody knew, because the CDO debt packages were made deliberately complex in order to spread risk among investors. Because it was so difficult to attach a fair value to these CDOs, nobody knew who was holding the bad ones. So everyone was suspicious of everyone else. Banks stopped lending to each other and the central banks had to step in to provide liquidity to money markets.
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Investors acted to avoid risk
Investors instantly (well almost instantly, they had never really trusted President Bush's reassurance) became scared of risk. Not just sub prime mortgage risk, any risk. They hauled their money out of previously profitable situations and ploughed it into US Treasury bonds, simply because there is no other market in the world that can absorb that amount of cash. There is certainly no alternative in Europe. The Dollar rose against the Euro and the Pound.
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Calm is slowly being restored
When the sky had not fallen in after a couple of weeks, investors ventured out of their bunkers and tentatively began to send their money back into the big wide world where it would work more efficiently. The Dollar fell back against the Euro and the Pound. There is still considerable nervousness about the sub prime industry and the CDOs that underlie it but calm is slowly being restored.
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Euro exchange rate risk
The point is that the Pound and the Euro came through the whole thing arm-in-arm, even though they have absolutely no formal relationship with each other. If they always moved together like that, UK investors would never again need to concern themselves with Euro exchange rate risk. But, whilst we may have another six months of stability, nobody is making any promises.
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Buying Euros forward and French property
So for French property buyers looking to buy property in the next six months, the only way to be sure of the rate you will get to buy Euros in six months' time is to fix it now. As long as you have enough cash to cover the deposit of 10% or so, a currency specialist firm (Advantages of using a currency broker or foreign exchange specialist) will fix an exchange rate for settlement in, say, six months' time. When that settlement day arrives you pay the Sterling balance and receive the Euros in your account. (Currency exchange options which save you money.) Sterling/Euro may well still be at its current level next spring but anyone who buys their Euros "forward" can guarantee that it will be, at least for them.
Additional articles which may be of interest:
Currency Exchange - Buying Euros at the Best Rates - Your FAQs
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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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