Wednesday, 01 April 2009 00:55

Today we"ll look at risk. First lets take a quick look at where the pound is this morning against a basket of major currencies....

Sterling Gains against Euro
The Sterling Euro exchnage rate oulook improved this morning, after the pound made gains against the Euro. Exchange rates for this currency pair are now getting close to 1.09 at the time of writing. The reason for the increase in GBPEUR exchange rates is the interest rate decision by the ECB tomorrow....

The ECB announce their decision at 12:45 tomorrow. Yesterday we saw data that shows EU inflation has plunged to an all time low. This means it is highly likely we will see an interest rate cut tomorrow. When inflation is low, often central banks will use a cut in interest rates to spur the economy. I think we"ll see them cut rates from 1.5% to 1.0%. A half point cut that could boost rates a bit more. Let"s see if I"m right tomorrow!

What does a cut mean for exchange rates?
Where an interest rate cut may be positive in many respects, it also provides less return for investors. These investors then move their funds to a currency with a higher yeild. So, with Euros are being sold in the market as investors dump their funds, the Euro loses value. It then becomes cheaper to buy.... hence higher exchange rates!

Over the last 12 months we have seen short spikes for GBPEUR, but they have always tended to be fairly short lived. It could be that this is the same, so these better levels may not last. Look at the risk options below if you"re not sure what to do!

Sterling US Dollar
Sterling also some gained against the dollar after better than expected consumer confidence data released yesterday for the UK. The Gfk/NOK consumer confidence figures were -30 in March as lower mortgage repayments boosted disposable income. This was better than expected, so another reason the pound has gained slightly over the last few days.

Canadian Dollar
The Canadian dollar strengthened yesterday also, backed by stronger oil prices and equity markets. Canada is a major exporter of oil, and so when the price of oil rises, so does the strength of the currency. The opposite is true for the US dollar.

Kiwi and Aussie Dollar
The Australian and New Zealand dollar both benefited yesterday as investors returned to the carry trade.

Risk
If you have a requirements to purchase a foreign currency, it"s extremely important to manage the risk. With an understanding of the risk involved when dealing with Foreign Exchange you are better placed to consider how to best manage that risk. The key ways are as follows:

Do Nothing – This high risk strategy means relying solely upon a spot contract and you won’t know the rate of exchange achievable until the actual point of buying the currency. The volatility and unpredictability of the currency markets makes this strategy high risk and speculative. The markets do move both ways, so it could result in a win (or lose) situation, however it does make budgeting for the future virtually impossible.

Secure a Forward Contract – This will enable you to lock into a rate of exchange the moment you know you have a currency requirement in the future. It will protect you against any market movement, both positive and negative and you will know exactly how much the transaction will cost you. The benefits extend to being able to calculate budgetary forecasts for at least the term of the Forward contract.

Use Currency Options –The two key tools are a Stop Loss order, which will protect you against adverse exchange rate movements and secure your currency if it falls below a pre-agreed level. The other is a Limit order, which is placed at the top end of the market to secure currency at a specific price that may not be currently available. This type of contract is particularly useful when the markets are moving in a positive direction for you.

To find out more about risk, please contact us today to discuss the options available to you.

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