Technology may not be able to perfectly predict FX movements, but used to our advantage, it can help us manage volatility and ensure we are across the very latest developments in the world’s largest financial market.
The dramatic drop in the Aussie dollar over the past year has caught many people off guard and unprepared. One day we were sitting comfortably above parity and then the next thing we know it’s around 90 cents and talk of an exchange rate at 80 cents or possibly lower. Taking one eye off the exchange rate for a few days or a week like this comes at a high cost.
Foreign exchange is a global market that rarely sleeps. Unlike the sharemarket that has clearly defined opening and closing times, outside which trade cannot be done, FX trading is continuous all week closing only for a short period of time on Saturday and Sunday. In addition the most popular and volatile time for FX trading is during European and US daytime hours when Australians are asleep. So it’s no wonder we often wake up to a vastly different exchange rate from the night before.
Fortunately, there are some tools that technology has provided us with that can help people be prepared and less reactive to ensure they get the best exchange rate they can.
People lead busy lives nowadays so making sure you are up to date with the latest movements in exchange rates can be difficult. This is one reason why many just leave any currency conversion to the last minute. By signing up for rate alerts you don’t need to be constantly checking exchange rates. You simply choose a specific exchange rate or multiple exchange rates (perhaps both higher and lower from the current rate) and set a rate alert. When the exchange rate moves to your desired level you’ll be instantly notified, by SMS, email or both. You can then make a decision to lock in an exchange rate or not.
If there is a specific exchange rate you would like to achieve then, instead of checking rates constantly or perhaps missing the exact day or time of day, a limit order might be a better option. Simply select the rate you want to exchange at, add the amount and the beneficiary details and if the market reaches that level, an FX provider can lock the rate immediately for you.
Note that this is a binding deal and is different to a rate alert as described above. A rate alert is simply a notification while a limit order is a binding deal.
For those travelling or simply wanting to fix costs for online purchases in foreign currencies then a travel card could be a good option. If you want to get your currency now, a pre-paid card is a useful and flexible option. You can lock in rates, avoid hefty transaction fees, such as foreign ATM charges, and manage everything online. It’s also a useful option for shopping online, offering good security as you can’t go overdrawn. You could in fact set a rate alert and, once notified, convert foreign currency onto your travel card. Unfortunately, limit orders are not generally available for travel card products.
If you have frequent transfer needs then scheduling regular payments may be a useful tool. This allows you to lock in a series of exchange rates (perhaps fortnightly or monthly) for recurring transfers, so you can just set and forget.
If you have a mortgage overseas, receive a pension from offshore or have regular supplier payments to make then, once set up, the transfers will automatically take place at known exchange rates. So there are no nasty surprises or unexpected variance in costs or income.
Even with the dollar falling, overseas shopping at certain sites is likely to remain competitive for a while, and travelling overseas should still feel reasonable compared to holidaying at home. But if the worst predictions come to pass, we may see a shift in online commerce and local versus overseas travel.
Jim Vrondas is chief currency and payment strategist, Asia-Pacific at OzForex, Australia’s leading international money transfer service.