Maximising the Euro (and £)/Aussie$ Exchange Rate
protect against Currency risks
When buying property in Greece/Cyprus
The Aussie dollar. Protect against risk from converting to £Sterling and Euro especially when buying property in Crete/Greece/Cyprus/Europe. Written by Ben Hirst of Citibank, Sydney exclusively for Brits in Crete. Of interest to long term British Ex-pat residents in Australia, returning to Europe to live or retire, or Aussies (even of Greek ancestry) moving to Cyprus/Greece/Europe to take up residence or put investment into property in the euro zone. It also applies to anyone, regardless of where they live and who are invested in AUD/NZD and wish to move assets into European property.
Timing of the markets to cash in your offshore investments in Australia, or Australian dollars can be a frustrating undertaking.
For example an investor, who sold their investment property in Australia in July 2005 for $500,000 AUD and then changed the money over into EUR, would have received $314,955 EUR at an exchange rate of 0.6299 (1.5875). Exactly a year later in July 2006, if another investor had sold their investment property for the same price, and changed it into EUR immediately, they would have received $294,000 EUR at an exchange rate of 0.5808 (1.7217).
As you can see from that simple example, changing money at the wrong time can be very painful and potentially wipe out any investment gains you have made in the past. Therefore I am writing this article to hopefully help explain some of the factors that affect the EUR/AUD exchange rate and give you some strategies that you can use to maximise your returns when exchanging AUD into EUR or vice versa.
Factors affecting the exchange rate: the Carry Trade
One of the chief factors affecting the exchange rate between two currencies is their current interest rate. These are normally set by the Central bank in each jurisdiction, in this case the Reserve Bank of Australia for the AUD and the European Central Bank for the EUR. Interest rate levels in a territory help banks decide at what rate to lend money to borrowers and most importantly in regards to exchange rates, what rate of interest they are willing to pay on depositors money.
A simple example of this is when we compare Japan with New Zealand. At the time of writing, interest rates in Japan are at 0.25%pa. This makes Japan and the Japanese Yen, a very unattractive investment for the Japanese investor who wants to earn interest. New Zealand however has currently the highest interest rates of all the developed countries at 7.5%pa. This makes it a very attractive investment for Japanese investors to borrow Yen at almost 0.25%pa and convert it into NZD and thus earn 7.25% pa yield on their NZD in a term deposit. A practice commonly known as a carry trade.
If a lot of investors start to buy the NZD, market forces dictate that this will drive the price of the currency up. This will make the NZD a much stronger currency, especially against the Yen.
In August 2008 Australia interest rates were 7.0%pa, whilst in the Euro zone they were 4.25%pa. In theory the AUD should be a much stronger currency at present than the EUR. This however is not the case, which shows that the exchange rate is affected by a number of factors and cannot be simply explained by interest rates alone.
Other factors Facing the EUR/AUD
When traded, the AUD/EUR is known as a cross-currency pairing. This means the trading volumes between the two currencies are not as large as when they trade against the worlds largest traded currency, which is the USD.
As the USA is the worlds largest economy, it is by no means a surprise that the USD is the worlds most traded currency and is used by many countries as a benchmark to peg their currency to. However the Euro zone is the 2nd largest economy in the world and with the EUR/USD being the most traded currency pairing. This has some important bearings on how this affects the EUR/AUD relationship as well.
To give a recent example, back in Sep 2006, Gulf countries made clear intentions to diversify their USD holdings to diversify risk, as they were heavy in USD Petro dollar holdings. This was because oil prices had been steadily rising since 2003 and increasing the volume of their receipts. Consequently they diversified some of the holdings into EUR and this had the consequence of the EUR strengthening against the USD but also the AUD.
The point I am making here is the relationship between the EUR/USD can have a bearing on the relationship between the EUR/AUD and can sometimes override differences in interest rates between the two regions.
The resource boom an historic anomaly
One key factor we do need to look at the moment is the resource sector in Australia. Australia is a large producer of commodities such as iron ore and uranium. Up to 2008 it was going through a resource boom super cycle due to the strong demand for commodities from high growth, developing economies like China and India.
This strengthened the AUD against other currencies. For example if a Chinese construction company needs iron for a large building project, they will need to purchase AUD to pay the Australian supplier of the iron ore Obviously, if a lot of Chinese and Indian construction companies are buying AUD to purchase iron ore from Australia, this is going to (via market forces) drive up the price of the AUD. This made the AUD hold one of its strongest positions historically against all major currencies. This will likely happen again as the demand for natural resources picks up again.
What is a good exchange rate?
The EUR/AUD has been trading since January 1999 when the European Monetary Union was formed, establishing the Euro as a single currency. The all-time lowest trade was at 1.5047 (0.6645) and the highest trade at 1.9176 (0.5214). The actual average exchange rate since 1999 is 1.6760 (0.5966).
Realistically, timing the absolute highs or lows of the exchange rate is difficult. So what is a reasonable exchange rate to feel you have got yourself a good deal? At present if you are holding Euros and are looking to exchange them into Australian Dollars, any rate you can get over 1.70 (0.5882) would be a good result. With the US economy, the worlds largest economy slowing down, world economic growth figures are being expected to be slightly weaker in 2007 through to 2008. Commodity prices have eased in line with this, though are still at historically high levels. As a consequence the AUD is still well supported for longer holdings of the currency.
If you holding AUD and looking to buy EUR, then any rate under 1.65 (0.6060), would be pretty good. The Euro zone is no longer the economic basket case it was in 2005 and we are now seeing some strong economic growth figures. We have seen 4 interest rate rises in the Euro zone in 2006 and the expectations of more to come to quell inflationary pressures. Australia however looks like it is at the top of the interest rate rising cycle, with the long term yield curve predicting cuts towards the end of 2007. Although interest rates and economic growth are notoriously hard to forecast, the long term strength is looking more promising for the EUR than the AUD.
July 2011 : Additional Notes by Gerald Brown, webmaster, Brits in Crete: The financial crisis of 2008/2011, in general terms is playing out in favour of both the AUD and NZD - Kiwi dollar. Both Australia and New Zealand appear to be weathering the economic storm better than other western world economies. Both currencies continue to be heavily reliant on natural resources exports - Australia in minerals and New Zealand in farm related products. Their direction is dependent on the world's economy picking up again, especially the economies of China and Japan. Both the AUD and NZD are recovering from dramatic falls against the USD, Euro, Yen and £ Sterling in 2008 with gyrating strengthening movements. AUD and NZD are still regarded as higher yielding currencies and a reliable bet.
Strategies to maximise your returns
Simply the more flexible you can be with your money, the better the potential exchange rate you may earn. If you can avoid being forced to change your money straight away, then it is possible to target a better rate of exchange. Liquidity is King when exchanging money.
One of the best ways to get a decent exchange rate is to get your bank to set up an overnight order. This means you can instruct your bank to buy AUD and sell your EUR at a target rate that is better than the current market rate. Foreign exchange markets are open 24 hours a day and it is easy to miss out on overnight volatility that can occur in the market which may provide an opportunity for a better exchange rate. The EUR/AUD can be a volatile currency pairing and can easily move up to 2 cents in overnight trading. So it is worth trying to capture the highs in the market this way.
Another good way is to bring over your EUR to Australia and hold them in an Australian bank account as EUR. It is possible then to hold them in this account earning interest in EUR and either set an overnight order or monitor the exchange rate yourself, until it moves in your favour. Some banks in Australia even have offshore EUR accounts so you can earn interest tax-free. As foreign exchange markets can move rapidly, it is easy to miss out on a good foreign exchange rate, through delays in bringing your money over. This can occur either through banking legislation red tape, or just the slowness of the transfer process. This option has the advantage of avoiding this as your money is already over in Australia waiting to capture the market quickly when it moves in your favour.
It is also worth getting to know your financial consultant or exchange rate personnel at your local Australian bank. You may be able to bargain a better exchange rate, especially if you are exchanging large amounts of EUR.
Dont be greedy When Targetting Exchange Rates
One thing I would advise is dont get too greedy when targeting exchange rates. I have often seen clients have unrealistic expectations about what exchange rate to target. If you see what you feel is a good exchange rate, then take it. Like I said before, it is virtually impossible to capture the highs in the market. The foreign exchange market can be quite volatile. Many a time I have seen a client ignore a good exchange rate and target something higher, only to see the rate fall back against them and then through lack of time be forced to take a unfavourable rate.
To highlight the consequences of being greedy, I will give you a real life example. A client of ours last year was looking to exchange a large amount of USD into AUD to buy a property. They held on for more than 6 months waiting for a decent rate. When the AUD dramatically weakened to 70 cents, from 75 cents, we advised the client to exchange. The client however was convinced the AUD would weaken even further to 65 cents. Unfortunately it didnt and the AUD came back up to 79 cents. By this time the client had found a property they wanted to buy and needed to exchange the money. Although they got a great bargain in getting an apartment at a 20% discount from the previous buy price, this discount was wiped out by them exchanging their money at 79 cents rather than 70 cents.
Hopefully some of this information will be useful to you, in regards to maximising your returns on your EUR or AUD. Remember every extra cent you can squeeze out of the exchange rate can really make a difference in your pocket, especially when you exchange large amounts of money.
Periodically updated. Latest July 2011.
Ben Hirst, Senior Financial Consultant at Citibank Wealth Management Banking in Australia at time of this article was originally written on buying property in Crete ( and rest of Greece/Cyprus) with AUD versus £Sterling and EUR currency risks.
Disclaimer this article for Brits in Crete reflects the opinion of the author and not necessarily Citibank.
