Buying Euros to Sell Later

piersuk

Could someone answer me a question that is causing some discussion at home.
I'm happy to settle at the 'today' rate for £3000 of Euros, so buying £3k.
In time when the rate falls will that £3000 worth of euros make money from selling back?

It's clear a good time to perhaps buy euros for forthcoming holidays but I'm considering an investment rather than to spend?

Thanks all

mlp

Well yes - if you buy at (say) £1 = €1.30 and sell at £1 = €1.10, you'll make a profit of €0.20 per £1 invested.

Don't forget the spread between buy and sell prices and commission. Plus the risk of stashing Euro notes under your mattress (unless you have a Euro bank account).

piersuk

Thanks - I'm thinking worse case of a commission rate of 10% still leaves a reasonable profit on £3k. Even if this takes a year to work out still better than the best savings rate.

redux

Why is it going to head in that direction?

bowlhead99

piersuk wrote: »

Thanks - I'm thinking worse case of a commission rate of 10% still leaves a reasonable profit on £3k.

Yes, if you pop down to Travelex now your £3000 might get you about €4000. Clearly if you wait a year until the Euro strengthens to be only rate is 1.15 to the pound, the pile of Euros will be worth £3500 which is a bit better than 10% more than you paid for them. Great, free money and better than any savings rate.

However, I'm not sure if I'm missing something, but why do you think the Euro rate is going to strengthen so much against the pound, with any certainty? If everybody (you know, the people with hundreds of thousands, or millions, or billions, or trillions, whose activities make up the daily transactions in the world currency markets every day) thought that a pound would only buy €1.15 in a year or two, they would be buying Euros like crazy and selling pounds, so that the rate would already be closer to 1.15 and not anything like as cheap as 1.35 today.

So, the market doesn't think Euros will only be 1.15 to the pound in a month or a year or three years. The 1-year forward rate is very similar to the current spot rate. The expectation is that you will not make 10%+ or anything like it, and that's ignoring trading fees. So if you buy a load of Euros, and pay a load of exchange commissions, and prepare to pay them again flipping back the other direction later, you have some pretty large costs to 'beat' in taking your gamble.

The trading costs make it not just a gamble but an expensive and risky gamble. What happens when the Euro continues to weaken and the spot rate is 1.5 and your €4000 is only worth £2666, and then you pay your trading fees and get back £2500 net? That is a lot worse than just leaving your £3000 in a bank account earning 3% a year entirely risk free (where your £3000 would turn into £3100 ish).

Even if this takes a year to work out still better than the best savings rate.

If we could all beat a guaranteed saving rate by buying Euros and waiting some period of time 'even up to a year' we would all be doing it. But we know we can't, with any certainty.

In May 2000, you could get over €1.70 to the pound. If you bought Euro now at 1.35 and sold them back at 1.70 you lose about 20% plus commission costs so call it 25%+

You seem to be guilty of looking at the last six years since the end of 2008 and thinking wow this Euro is as cheap as it's ever been, it moves in a range from 1.10 to 1.35 and now it's the cheap end of the range. However, for all dates up to about the end of 2007, the current tourist rate of 1.35 ish would have been the absolute most expensive point in the history of the Euro!

It has been way cheaper than this before and the Euro economy is suffering from rock bottom interest rates and quantitative easing (money printing) making Europe really cheap, getting cheaper by the month. There is no miracle reversal of fortunes on the cards - or if there is, why hasn't everyone already bought into it?

This is not the place to go off on a political or economic tangent. But to answer your original question, yes of course you can buy something cheap and sell it when it gets more expensive. You can do that with a barrel of oil or a bar of gold or a foreign currency banknote or a share in a company. Only the share in a company is likely to get more valuable over a long time period in real terms, because the company makes profits which are owned by its owners the shareholders.

All the other things just sit there and their prices are the product of speculation; their direction of movement might work in your favour or might work completely against you, when you place your bet thinking 'you could make more money than interest on a bank account'. You could also lose your shirt. The lack of risk is why bank accounts don't pay very much.

PeacefulWaters

Casino margins on roulette are lower than currency dealing spreads for small trade.

Go and put £500 on black.

You'll make about the same profit or loss, just a lot quicker.

bowlhead99

That's right, just keep ploughing money into the casino gaming tables and leave when you've got your balance 10% up.

"Even if this takes a year to work out still better than the best savings rate".
:rotfl:

Biggles

In the real world, even if the rate went your way the spread would erode any profit.

If you were intent on doing it, the best way might be to get a cheap Ryanair flight to a Euro country and use a few commission-free cards to draw cash out.

benjus

A better way would be to open a Euro account and send the money over using a cheap FX broker (e.g. Transferwise), which could have a spread of less than 1%. You can then send it back to your GBP account sometime in the future. You might be able to find a Euro account that is free as long as you keep the £3000 in there. AFAIK there are no longer any Euro accounts available to UK residents that are both fee-free and have no minimum balance; the Britline one based in France is quite cheap.

Remember that what you are proposing is speculating on the financial markets. Generally speaking an exchange rate settles at a level where opinion is equally split as to whether it will rise or fall, so you should not regard it as a sure thing that the Euro will strengthen. However, if you are convinced it will move in that way and you're prepared to put your money where your mouth is, go for it. Just remember that you're taking a risk.

EdGasket

Just get a forex account if you want to play currencies. Then when you have lost your money, come back here with another suggestion.