Expat’s Guide to Currency Exchange

Expat’s Guide to Currency Exchange – One of the biggest risks to Australian expats is currency risk. The perpetual fluctuations in exchange rates across all currencies can rapidly impact an individual’s total wealth, and in turn their goals and objectives.

As such, Australian expats would be wise to account for this risk in their long-term financial planning strategies.


What influences currency exchange prices?


There are a number of influences that control the rise and fall of currencies, however a few of the main contenders include.

  1. Inflation,
  2. Interest rates and monetary policy,
  3. Trave value (imports and exports),
  4. Economic health,
  5. Supply and demand,
  6. Public debt,
  7. Geopolitical stability and performance.

These influences can impact you on a personal level. For example, if the economic health of a country deteriorates due to political instability then that nations currency is likely to see a corresponding drop in value and demand.


Case Study 1 – Australian Expat using currency exchange in one transfer


Joanna is an Australian expat and has been living in the UK for the past 5 years. She has picked up a significant amount of assets and cash savings in pounds (GBP).

Since the COVID19 pandemic, Joanna set her sights on repatriating home to purchase a main residence inSydney, Australia.

In preparation she sold her UK investment property to free up capital for the Sydney purchase.

The sale event and proceeds are outlined below.

UK Property sale proceeds:           GBP1,000,000 or AUD$1,900,000

GBP/AUD exchange rate:              1.90

As seen above, Joanna currently has GBP1,000,000 available to fund her Sydney property purchase after repatriating.

After a few months she finalizes her move to Australia and found a property worth AUD$1,850,000 which she would like to purchase.

Unfortunately for Joanna the exchange rate has not moved in her favor and is now at a exchange rate of 1.70. Let’s see how this has impacted her net wealth.

UK Property sale proceeds:           GBP1,000,000 or AUD$1,700,000

GBP/AUD exchange rate:              1.70

The fluctuation in exchange rates has decreased her net worth by $200,000 in a matter of months.


What can a expat do to mitigate currency exchange volatility?


Small currency fluctuations may not appear to have an impact on you, although when you start dealing with larger amounts a change in currency value can have a substantial effect to your total net wealth.

One of the best methods to deal with currency volatility is to view your currency through the same lens as your other assets such as shares.

Through this lens you can identify that selling an entire asset all at once drastically increases market timing risk, therefore to mitigate timing risk a simple dollar cost averaging strategy can be implemented.

Dollar cost averaging is the process of spreading out your entry and exit points at regular intervals, and by making transfers in this manner you are not attempting to pick the lows or highs of the market but rather choosing a fixed dollar amount regardless of currency trends.


Case Study 2 – Australian expat using dollar cost averging for currency exchange


In preparation for Tim’s return home, he began transferring his GBP to AUD on a monthly basis. As seen below some entry points were at the peak of the exchange rate and others at the bottom.

expat currency exchange


By spreading out his exit points over 9 months Tim managed to have an average exchange rate of 1.82, thereby mitigating his timing risk of the currency conversions.


International money transfer


Now that you have a sound understanding of currency volatility and mitigation strategies, we can begin to look at different methods to facilitate the currency exchanges.

Your first thought might be to use a bank-to-bank transfer, we would caution otherwise! Whilst bank to bank transfers might seem easiest, banks often take a large margin of 5% over the daily exchange rates when sending your funds overseas.

At first glance this may not seem like much, however on a transfer of $10,000 that transfer would cost you an extra $500, plus the typical fattened ‘transaction fee’.

Considering the above, we recommend you consider using a currency transfer platform which often have very sharp rates and minimal fees.

For large transfers you are often able to reach out and request an account manager to assist and track the transfer (trade trick – you’ll be surprised what an email can do to sweeten the rate offer).

Currency risk will ultimately remain one of the more prominent risks to expats and it is important to always consider your long-term plan and objectives before making any decisions.

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