How to navigate volatile currency markets
Experts advise Harvey Jones on the best strategy for those looking to remit their dollar-linked dirhams
They say every threat is an opportunity, and that certainly applies to the current state of the British economy and the pound. Sterling’s slump after the shock European Union referendum result in June 2016 handed UAE expatriates an unmissable chance to send money to the United Kingdom at favourable exchange rates.
That opportunity appeared to have faded as the pound strengthened more than 10 per cent over the past year, amid growing hopes the UK would strike a satisfactory deal with the EU. However, Brexit uncertainty is back amid political divisions and the pound has slipped again, giving UAE expats another opportunity.
Right now, the UK’s relationship with the EU hangs in the balance, and so does sterling.
If you are sending your US dollar-linked Emirati dirhams back to Britain, what should you be doing right now?
Swede Edward Hartung, 30, has been taking advantage of sterling weakness to build up funds in the UK, where he plans to invest in property.
The IT professional, who has worked for Oracle in Dubai for the past three years, and previously split his time between London and Dublin, says the UK remains an attractive place to invest in property despite Brexit fears. “My ultimate dream is to buy somewhere in London, but that is expensive, so I have been considering student property in cities such as Southampton and Manchester, which is affordable with generous yields.”
Each month, Mr Edward transfers a chunk of his earnings to his UK bank using currency transfer service MoneyMover.com. “I transfer on an ad hoc basis, taking advantage of any swings in my favour. Money Mover makes it really easy, which is a big help as I am so often on the move. When I talk to friends, none of them seem to get a better exchange rate.”
The pick up in the pound means his dollar-linked dirhams do not travel quite so far but that would quickly change if the UK crashed out of the EU without a deal. “If the UK strikes a deal and the pound strengthens, I might rethink my plans and buy in Europe instead.”
Earning your income in one currency while planning your retirement in another exposes expatriates to major currency risk.
Briton Calum McKie, 53, and his wife Angela, who have lived in Dubai’s Meadows community, Arabian Ranches and now Umm Suqeim for 15 years, cashed in on sterling weakness one year ago, when they sold a property in Dubai and bought an apartment in Southampton as their UK base.
At the time, Dh1,000 bought around £210, against as little as £190 in April and £201.32 at time of writing and Mr McKie, who works in upstream oil and gas, was pleased to get an attractive rate.
However, now he needs to make another currency transfer amid renewed sterling volatility as the UK economy starts to slow and Brexit fears grow.
Sensibly, Mr McKie does not pretend to have any idea where the dollar-sterling exchange rate will go next, and is responding by transferring money little and often. “Since the overall trend for the past six months has been strengthening the pound, I have been slowly converting surplus AED salary into GBP,” he says.
The pound picked up as Brexit fears receded, the UK economy showed resilience and markets anticipated that the Bank of England would raise base interest rates from 0.5 per cent to 0.75 per cent on Thursday.
However, now sentiment has completely reversed, and the pound has plunged more than 5 per cent against the US dollar in recent days as a result. Plus the BOE looks set to keep interest rates on ice this week and cut its forecasts for both growth and inflation due to unexpectedly weak economic data.
Lee Wild, head of equity strategy at UK-based investment platform Interactive Investor, says sterling will struggle to recover after recent figures showing GDP growth collapsed to just 0.1 per cent in the first quarter of 2018, down from 0.4 per cent in the last three months of 2017. “A rate rise this month now looks incredibly unlikely,” Mr Wild says.
Joshua Mahoney, market analyst at online trading platform IG, which operates in Dubai, says the pound is down but not out. “The disappointing first quarter GDP reading was largely driven by a construction sector which suffered from the effects of the ‘Beast from the East’ winter storm, and the second-quarter GDP reading should improve markedly.”
Hatem Sleiman, regional vice president, Middle East, Afghanistan and Pakistan, at Western Union, says that while the pound has slipped the fast-growing US economy is boosting the greenback. “The US dollar has also seen some strong gains, giving the dollar-pegged AED strength as well,” he says.
Miles Eakers, chief market analyst at Centtrip, predicts further dollar gains with the US Federal Reserve likely to become more hawkish as inflation picks up.
“In my opinion, the Fed will
continue tightening monetary policy and I expect three interest rate rises this year.”
So what strategy should expatriates looking to remit money to the UK adopt?
Chris Canning, head of private clients at Argentex, says this volatility makes it difficult for UAE expatriates with financial ties to the UK. “We’ve seen the GBP/AED currency pair move as much as 5 per cent in the last few weeks, which can make a dramatic difference to those repatriating earnings.”
Mr Canning says there are major risks in both directions. “If the Bank of England does raise rates this year it would be pound positive, although any potential gains could be limited by Brexit. Similarly, if the Federal Reserve continues to increase rates, the dirham
could appreciate markedly,” he says
Given the uncertainty, he suggests those looking to buy pounds should seize opportunities as they arise. “People may be tempted to delay transactions in the hope that sterling will weaken further rather than accepting the rate where it is. A sensible approach is to convert the funds in stages, taking advantage of a trend in your favour.”
Mr Canning says those who want more stability could enter into a forward contract, locking into an exchange rate to send regularly monthly amounts for one or two years. “This is particularly useful if you do not have the AED available yet but would like to take advantage of a preferable exchange rate.” The danger is that you end up locking into a rate that quickly looks unfavourable, but Mr Canning says: “A reputable currency broker will help you make educated decisions when executing foreign exchange transfers.’
Hamish Anderson, chief executive of UK-based foreign currency exchange platform MoneyMover, cautions against second-guessing currency movements. “Forecasting is a notoriously unreliable business, even for big banks and institutions with all the research and resources at their disposal,” he says.
You should also beware commentators who may have an ulterior motive. “Many predictions designed to generate more business by prompting clients to carry out transactions,” says Mr Anderson. One thing can be stated with confidence, he adds. “In the short to mid-term, sterling volatility will remain high. There are still so many unknowns surrounding Brexit and it will be some time before things settle down.”
This could extend past the official exit deadline at midnight on March 29, 2019 as the UK economy struggles to embrace the new economic and regulatory environment, Mr Anderson adds.
Those with regular commitments such as mortgage payments should consider locking into a forward contract to protect themselves from future currency swings, he says.
The analyst also recommends setting up several bank accounts allowing transactions in every currency you are exposed to. “Opening them can be awkward but allows you to take control over how and when you make your exchanges, rather than letting your bank automatically convert funds upon receipt,” says Mr Anderson.
Always shop around for the best exchange rates because transferring through your usual bank is unlikely to be the cheapest option. “Banks are not that transparent, making it hard to see the real cost of a currency transfer, most of which comes in the exchange rate spread.”
Also watch out for hidden charges, which may be added on top and can total 4 per cent of the sum you send. A fee of this size would eat up Dh4,000 of every Dh100,000 you transfer.
“Finding the right international payments specialist is time well spend as your investment will quickly be repaid in savings and also service improvements,” Mr Anderson says.