In this guest post I’d like to share some tips to help your maximize your exchange rate, when you change currencies for your business.
If you’ve spent any time at all watching the exchange rates, you’ll already know that predicting the rates is not that different to gambling. There are so many countless factors influencing the markets at any one time, guessing right which way things are going to go is as much about luck as skill. For instance, right now things affecting the US dollar are as diverse as: the Republican presidential nomination, improving US auto-sales, the likelihood that Greece will default, lower Chinese growth forecasts for 2012, alongside many other things. If you need to exchange currencies for your business, getting a good exchange rate can hence be a real headache!
Fortunately then, you might be pleased to hear there are certain steps you can take to improve your chances of getting a good rate. You might not be able to predict whether a lower US unemployment will boost the dollar or not, but you can limit the risks you take, and so gain some peace of mind.
Perhaps the single most important thing you can do to improve your exchange rate is to plan ahead. This means looking into the exchange rates and getting guidance about your transfer as far in advance as possible. For instance, you might recently have completed an export order to France, and received payment in euros. How do you maximize your return when you convert those euros into UK sterling or US dollars? Above all, the worst thing you can do is simply decide one day that you’re going to change currencies, without previous planning. This is because you’ll have to accept whatever rate is available, without knowing whether this is a 12 month high or the worst exchange rate in months.
What is influencing the rates?
Instead then, take a look at Google Finance or the BBC and find out what’s influencing the market. Is Europe about to enter a new recession? That might be giving the US dollar a boost, although it’s unlikely to be benefiting the pound. Is Herman Cain about to become the Republican nominee for President? He hasn’t been known to inspire a lot of confidence, which might cause the US dollar to tumble. In short, doing some research will help you discover where the market’s at, and hence the kind of exchange rate you can expect. It means you’re not changing thousands of euros or dollars blind.
Take specialist guidance
In addition, taking specialist guidance, whether from a foreign exchange broker or a bank, can also help you maximize your exchange rate. Specialists after all watch the exchange rates on a daily basis, and so have in-depth knowledge about both what’s affecting the rates and what might happen. Why try to guess if Greece is about to exit the euro or not, when you can speak to someone who can provide a much more informed perspective? Furthermore, specialists either from a bank or broker can also provide guidance about the most appropriate foreign exchange contract for you. Might a forward contract be a better choice than a spot deal? This enables you to lock in the exchange rate today, if you don’t need to change currencies for some time. It could be a good idea.
Which service do you choose?
Of course, in addition to the entertaining problem of figuring out which way the exchange rates are going to go, there’s also the more bread-and-butter issue of choosing a service to change currencies with. How do you go about this? In the UK at least, make sure the service you choose is directly authorized by the Financial Services Authority. This is the government organization responsible for regulating financial services, and making sure that banks and foreign exchange brokers prioritize client security above all else. Hence, foreign exchange services authorized by the FSA maintain funds in designated client accounts, protecting them from harm. It means you can feel secure using a particular bank or broker. Of course, in the US and Europe there are equivalent government regulators.
Look out for fees and commission!
In addition, make sure the foreign exchange broker or bank you use does not charge commission or fees. This is especially common among high street banks, who take advantage of their household names to impose unnecessary fees on clients. HSBC for instance charges £100 for people opening an international bank account. Simply put, if you shop around this is not a fee you have to pay!
Those then are some helpful tips to keep in mind the next time you change currencies for your business. Whether you’re a farmer hoping to change a Single Farm Payment into UK sterling at the best time, or a US manufacturer exporting goods to the EU, good luck getting a better rate!
Michael Smith at foreign exchange specialist, Pure FX. Check out our blog for up-to-date financial comment!