Any Questions - Currency - July 2009

Tuesday, July 28, 2009

Any Questions - Currency - July 2009

The expert
Nick Fullerton is a director of foreign exchange provider FC Exchange. For further information call 020 7989 0000 or visit http://www.fcexchange.co.uk

Unravelling the rates at currency kiosks

Q. Why do the 'buy' and 'sell' exchange rates at retail currency kiosks, for example, at airports, vary so much, and how come some charge commission and others don't?
Ian Loosmore, Teeside
A. The exchange rates that are available at the airport through the various kiosks are referred to as tourist exchange rates, probably because most of the time they are used by people looking to convert holiday money.
Unlike the stock market, where all participants have access to the same prices, the foreign exchange market is different because it is divided into levels of access which are determined by volume. At the top is the interbank market or mid-market price, which is basically the centre point of any exchange rate or currency pair. Below that there is a commercial rate of exchange, then a bank rate, and finally a tourist rate. Every exchange rate will have a buy price and a sell price. When buying a currency you will get an exchange rate lower than the interbank rate because a currency provider has to buy the currency first and then re-sell it. The same principle applies when selling a currency.
Currency brokers and foreign exchange providers buy slightly below the mid-market price and then have to re-sell the currency in order to make a profit. The difference between when they buy and when they sell is where they make their money. Currency brokers are different from kiosks because they handle larger volumes and trade at commercial rates of exchange that are significantly better than tourist rates.
The reason the exchange rate varies as much as it does from kiosk to kiosk is because it is usually set by the provider (the company that owns the kiosk). Of course, the exchange rate moves daily, but this movement will not affectthe exchange rates quoted because the margin applied by the kiosk is extremely wide and can therefore absorb any fluctuation that occurs over the course of the day.
Obviously when you take all of this information into account, you can see why currency kiosks converting smaller amounts of money need to take wider margins in order to cover the cost of their overheads. Most currency kiosks unfortunately will also insist on adding a commission on top of the margin that they apply. The commission or handling fee that is appliedto your transaction is basically like a charge for the service. Whether or not a commission is applied will also depend on the provider. If a commission charge is being waived, then double-check the exchange rate as it is bound to be tucked away somewhere.

Riding the exchange rate rollercoaster

Q. I looked at the exchange rate last week and then again recently, how can it be so different, and how will I know when is the best time to convert my funds?
Leah Soutard, via e-mail
A. There are generally two things that most people discover when they want to buy currency. One is that exchange rates move constantly, and the other is that they can move a large amount in a relatively short period of time.
Anyone who has bought a property abroad will immediately tell you how volatile the foreign exchange market is. This market is extremely liquid and very sensitive. A lack of knowledge and a poor understanding of what affects exchange rates is also what makes this market particularly unforgiving.
Every time the market moves there will be a reason for it. Monthly data releases come together in the form of an economic calendar, covering everything from inflation (measuring changes in the prices of consumer items) to retail sales figures (measuring consumer demand and confidence).
Trying to jump on the exchange rate at exactly the right time is always going to be extremely difficult, but your odds could be greatly improved by dealing with somebody who knows what they are doing - a currency broker.
Remember that luck favours the prepared. Set a realistic budget where you can work towards achieving your target exchange rate. Make sure that your currency broker is aware of your timescales and goals. Contrary to popular belief, the more they know about your situation the better.

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