Mitigate your currency risk

THE ONGOING Eurozone sovereign debt crisis might have been disastrous for most Europeans, but for some Brits, it must have provided welcome relief. Thanks to European worries, the pound has rallied by nearly 6 per cent against the euro in little more than a month.

For many pensioners living abroad on sterling denominated pensions, or holiday home owners with euro denominated mortgages or bills, the devaluation of sterling over the last three years has been incredibly painful, but it needn’t have been. Currency brokers are increasingly offering private clients the chance to hedge against currency risk and to get the very best rates when making big transactions.

And about time too. According to research by currencies.co.uk, an online currency broker, over the last year, the numbers of their clients selling up and repatriating money back to the UK has increased by 28 per cent, mostly thanks to the weaker pound.

The research observes that a monthly pension of £1,175 would have been worth €1,793 at sterling’s five year high, but only €1,204 at its low – a 49 per cent difference. Even more dramatically, the sterling-Australian dollar exchange rate saw a 67 per cent swing over the same period.

Failing to take into account exchange rate shifts can be expensive. Stephen Hughes, the director of currencies.co.uk, says that: “Often, people can spend all day negotiating a few thousand euros off the price of a property, only to lose it all on the flight home when the exchange rate shifts before they make the transaction”.

Specialised currency brokers such as currencies.co.uk and World First offer clients forward contracts, which can be agreed at the moment that a deal is struck. That means that you can lock in a particular exchange rate when you decide to buy a property and so insure yourself against adverse movements while you arrange the financing.

For those making regular transfers after buying a property, forward contracts can also be set up to guarantee a rate for up to two years, so you can guarantee that your maintenance costs or pension will be predictable for that long. Most currency brokers also offer regular transfer schemes for pension or mortgage payments to help cut the costs of commissions and transfer fees.

It is even possible to benefit from currency movements without exposing yourself to too much risk. Most brokers let you set up an automatic order to convert money when the exchange rate hits a particular level, so you can ensure you buy at a good price, while a few such as World First will let you buy options which insure you against detrimental movements in an exchange rate without locking you in if it improves in your favour.

According to Jeremy Cook, World First’s chief economist, the pound ought to improve next year. But with volatility still the norm, the chance to buy some insurance seems a rather good idea.