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The way forward

By Peter Rexstrew [email protected]

Peter Rexstrew is the owner and Managing Director of Premier FX, currency exchange brokers based in Almancil. Peter has vast experience of the foreign exchange markets having worked in the trading rooms at various London banks. Enjoy his take on the currency markets.

Early in the year we have already seen some currency volatility. Sterling against the Euro has traded just above 1.20 and back down to 1.17 and 2011 is only a few weeks old.

The economy is still struggling to grow and the UK could easily be weighed down by the troubles in Europe, as many UK banks are exposed to these countries, so a bail out by the authorities does not really help the UK as the banks there have lent in countries like Spain and Portugal.

Interest rates will almost certainly rise in the UK, probably later in the year. However, the impact on Sterling may be rather muted. Mechanically, rising rates should lend support to the Pound, but it’s doubtful that Sterling can lastingly benefit from higher interest rates.

The weaker credit outlook that this creates would probably undermine any currency gains. Therefore, general consensus is that Sterling cannot sustain any move too far above 1.20.

So, do we have a crystal ball to say where Sterling will go this year? The honest answer is no, but it certainly is the year to plan your currency strategy if you can.

It could be a good idea to look at forward contracts, especially if you have a currency purchase in the future and the rate is good now.

A forward contract is where a rate can be agreed at a set price but not paid for until a point in the future. This rate stays the same whatever the market volatility during the period. It’s a good way to plan your currency strategy, if you’re in the position to do so.

Of course the level of the currency will influence your decision-making. Fixed exchange rates may be a good idea in the short term, perhaps for three to six months.

If you have regular monthly payments, then fixing a rate takes much of the stress out of your currency transactions. Whatever happens in the market and however volatile it is, you know exactly how much you are going to get for your hard-earned Sterling.

If the exchange was to rise during your fixed period then you can renegotiate a rate when it comes to an end. That is why it may be advisable to only look at trades no further than six months ahead.

One thing that is certain is that 2011 is going to be a tough year for world economies, and almost all exchange rates will be heavily influenced by economic factors in some shape or form.

It may just be a good time to chat to your currency broker and have a “currency health check” to see if you can save yourself some money this coming year.
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