Forex Currency Trading

starsky78

Hello everyone,

Savings & Investments possibly isn't a perfect fit for this question but it's probably the most suitable given the options.

I've recently returned from a 2-year working trip in Melbourne. I have accumulated over 100,000 AUD, which I eventually want to exchange for GBP. However, the current rates are terrible - 1AUD is down over 0.2GBP compared to where it was 2 years ago. The reports are that the AUD is going to slide even further with China's slowdown, so I'm thinking it may be prudent to make an exchange now as I can always buy back AUD later when it looks to start gaining value again. The charge for the exchange for amounts in this region through a Forex broker is £200-300, which seems fairly meagre in comparison to fluctuations in the value of AUD (I've 'lost' £800 today alone).

My question is: is a Forex broker the most efficient method of trading currency in this way (and type of 'short selling')? I have UK and Oz bank accounts so I have 'homes' for funds at either end.

Would be interested to hear your thoughts.

Mistermeaner

Up or down is a 50/50 gamble. It could go either way at any point in time and perceived risks (eg China) will already be priced in.

A strategy to minimise risk of significant losses or to 'smooth' the volatility could be to change a little at a time (eg 1k per week) or spread your rid through multiple currencies - eg 1/3 usd 1/3 GBP 1/3 aus etc

Doesn't really answer your question re trading costs but Google should be pretty good for that and I hope the above is helpful and relevant to you.

Of course it would help to be clear on where you are planning to be ad therefore what currency you need. If your moving back to uk permanently little point keeping Aussie money

starsky78

Thanks for your reply.

Ultimately, I want to exchange to GBP as I intend to have my roots in the UK, where I am currently based. But, naturally, I want to maximise the amount of GBP I get for my AUD. The amount of AUD I have was 3-4k GBP more not 2-3 months ago. The dumb thing that I did was to wait and try and change the whole lot at one go once my tax and pension was sorted (ATO took forever) thereby saving on the forex commission, which I thought was going to be far more than what it actually was. Volatile, but somewhat predictable, changes in exchange rate far outweigh commission fees.

My thinking now is that if I exchange all my AUD to GBP I will at least not be exposed to any further depreciation. In the unlikely event that AUD will appreciate, then obviously I won't be able to benefit from that. However, if AUD further depreciates signficantly - a distinct, highly likely, possibility by all accounts - I will, at least, have the option of buying it back, thereby making money. Of course, no-one knows when the exchange rate will bottom out but one can make an educated guess on general trends based on historical data and the financial climate at the time. I'm somewhat reticent to buy other currency because I haven't followed them and, furthermore, presumably I'd need a US bank account to deposit USD, for example.

bowlhead99

starsky78 wrote: »

My question is: is a Forex broker the most efficient method of trading currency in this way

I have UK and Oz bank accounts so I have 'homes' for funds at either end.

Yes, using a broker will get you the best rate when you have large amounts to sell/buy.

(and type of 'short selling')?

Short selling is when you sell an item that you don't actually have in the hope of buying it back later and make a profit when you equalise your position back to zero (e.g., "I don't actually have any shares of Tesco plc. But if I had them I would sell them now because they will be cheaper later. I feel so strongly about this that I will even sell shares that I don't even have, and be short of them, and buy them back later, hopefully cheaply, so that I can give them back to whoever I borrowed them off when I sold them first time around").

You already have lots of AUD, 100k+ of them. Presumably you are not going to actually sell more than the 100k+ of them - you are just going to sell some of the dollars you have, to buy pounds? Selling, rather than short selling?

If you did sell short you would effectively sell all the dollars until you don't have any dollars left, and then keep selling more dollars than you actually had, leaving you owing dollars to someone, leading to you being literally, "short of dollars". This is fine if dollars get cheaper to buy back and settle the debt, but means you commit to losing real pounds money for every cent the AUD strengthened as the debt would become harder to pay back. Do you actually want to do that or do you just want to reduce your existing exposure to a decline in value of AUD against sterling?

starsky78 wrote: »

Ultimately, I want to exchange to GBP as I intend to have my roots in the UK, where I am currently based.

My thinking now is that if I exchange all my AUD to GBP I will at least not be exposed to any further depreciation. In the unlikely event that AUD will appreciate, then obviously I won't be able to benefit from that.

OK, that sounds fine and eminently sensible.

However, if AUD further depreciates signficantly - a distinct, highly likely, possibility by all accounts - I will, at least, have the option of buying it back, thereby making money..

Think of what you are saying. Your end goal is to be left with pounds, right? Lets say you have $110k and you convert that into £50k today. So, you do that and you get ten thousand nice crisp five pound notes in your hand. That is what your pile of dollars is worth.

Then, lets say AUD depreciates significantly by Christmas which you think is a highly likely probability, so $3=£1.

At that point, you will be sitting there with the £50k of cash and if you want you could buy $150k with it. But you don't actually want AUD. Your end goal is to hold a pile of GBP because you live in the UK and its pounds that you need to spend whether for living your life now or in retirement many years down the line or whenever.. So, you can be sitting there with £50k of cash or you can be sitting there with $150k of cash which is worth £50k of cash. Bottom line, you'll have cash worth £50k. Which is what you have today.

So yes, you can buy dollars back, which you don't actually want, because you are living your life in pounds, but you can't say "I will have the option of buying it back thereby making money". You don't "make money" like that. You have £50k worth of foreign currency today. If you convert it into £50k cash today, you could choose to buy back £50k of AUD at Christmastime or £50k of NZD or USD or Pesos or Euros but they will all be worth £50k because you just bought them for £50k at that moment.You have not 'made money' by selling AUD now and buying it back when AUD is cheap. Whatever each unit of AUD is worth now and at Christmas, you will make zero pounds of profit if you hold pounds between now and Christmas.

An Aussie dollar is worth between 40p and 50p today. If it's worth between 20p and 40p at the end of the year, you have not 'made money' by having more AUD in your hand at the end of the year than you had today. Because each dollar is worth less money.

Think of it another way. You have $110k today. If you sell it all to buy £50k but and then at the end of the year the rate is 3:1, you can buy back $110k in your Aussie bank and have £13.3k in your UK bank. But you have not 'made money'. Because, although it looks like you still have all your $110k *and* some nice British money on top, it is just smoke and mirrors. The $110k is not worth as much as it's worth today. It's only worth £36.7k, which when combined with your £13.3k of pounds is worth the exact same total as you had today.

The only way you can actually make money out of the AUD weakening is if you literally go short of AUD. So, sell your $110k to get £50k. Then, borrow another $110k and sell it to get another £50k. When dollars 'inevitably' become dirt cheap, buy back the $110k with only £36.7k, and pay off the debt, leaving yourself with £63.3k in the bank which is more than you have today.

But going short is a straight gamble with money you don't have. If the rate went the other way you would lose the money you hoped to gain. So, it's not a sensible move.

By contrast, converting large amounts of foreign currency - which you don't ultimately want, because you want pounds - into pounds, is eminently sensible no matter what today's rate is. Because you remove currency risk from your life.

starsky78

Thanks for your detailed response, bowlhead99.

I take the points you raise onboard and understand what you're saying but I think you misunderstand my intentions. Yes, ultimately I do want GBP but not at any cost. AUD has depreciated significantly in the last 12-18 months, so my AUD aren't worth (as) much now comparatively. I've been waiting for a couple of months to see whether AUD would bounce back, but it hasn't, so rather than just wait in the hope that I get a more favourable exchange rate, I want to be a bit more proactive about it to avoid any further 'losses'.

It is clear that China is and, in all all probability, will continue to adversly affect the value of the AUD, so rather than suffer further losses, I was thinking about exchanging my AUD to GBP now. 110,000 AUD is now roughly 50,000 GBP. If, as in your example, there is further depreciation in the remainder of 2015, 110,000 AUD could be worth only 40,000 GBP, so in theory, I could either stick with the GBP I would have already bought back (begrudgingly because of how AUD has depreciated over the last 12-18 months) or I could buy back my 110,000 AUD for 40,000 GBP, effectively giving me 10,000 GBP profit (I wouldn't buy back 50,000 GBP worth of AUD at the new rate because ultimately my goal is to maximise my GBP as you correctly identify). Obviously, I wouldn't make the decision to buy back currency I don't ultimately want lightly and would only do so if it was likely to appreciate moderately based on historical rates and economic climate at the time.

It is worth considering that 2 years ago 110,000 AUD was worth 75,000 GBP, so the value of AUD is pretty low now historically, so once the current issues are remedied, it will likely bounce back. I think it's probably unwise to hold on to my AUD in the meantime because it will probably depreciate further and may take a long time to bounce back.

Mistermeaner

Why will it bounce back?

Any known or expected (which are known) influencers are priced in - unless you have privilege insight that the market doesn't.

The price now is the price and it has a 50-50 chance of going either up or down at any given moment. To gamble on the price going either way at some point in the future is just a gamble. Nothing more.

Think if it another way - if you decide to sell (or buy) someone must match you with purchase (or sale) so you both must agree on a price. What is to say which of you will have got the best deal at any given point in the future?

It's what is known as a zero sum game (less commission) only winners are the brokers.

Don't play!

There are strategies to spread your risk or even hedge but all come at a cost

marathonic

starsky78 wrote: »

Thanks for your detailed response, bowlhead99.

I take the points you raise onboard and understand what you're saying but I think you misunderstand my intentions.

In reading bowlhead99's response, I think he clearly understood your intentions, however misguided they may be.

starsky78 wrote: »

It is worth considering that 2 years ago 110,000 AUD was worth 75,000 GBP,.

No, it's not worth considering. The value of the Australian dollar 2 years ago is irrelevant. It may never reach those valuations again. It may reach them again in 6 months or it may take 10 years. No one really knows.

If you buy the Australian dollar back again in 6 months after it depreciates 10% from today (potentially), what do you do when it depreciates further? Do you wait until it bounces back? What if it doesn't bounce back? Do you intend to be sitting in the UK with things to buy in UK pounds but having all your savings to date sitting in dollars.

bigadaj

It might be worth the OP reading exchange rates going back more than a few years, the Aussie dollar has never been as strong as it has in the recent past. This was a reflection of its dependency on mining and the strength of that sector, which is now pretty bombed out.

Move the money when you need it, or alternatively in regular chunks to ensure you don't change all of it at a bad rate, forex trading is difficult and risky for small investors, unless you are at a big bank and can ring your mates to fix the rates!

bowlhead99

starsky78 wrote: »

I was thinking about exchanging my AUD to GBP now. 110,000 AUD is now roughly 50,000 GBP. If, as in your example, there is further depreciation in the remainder of 2015, 110,000 AUD could be worth only 40,000 GBP, so in theory, I could either stick with the GBP I would have already bought back (begrudgingly because of how AUD has depreciated over the last 12-18 months) or I could buy back my 110,000 AUD for 40,000 GBP, effectively giving me 10,000 GBP profit

But there is not 10,000 GBP profit. At year end you are simply choosing to exchange the 50,000 GBP which you want for the long term for 10,000GBP which you want for the long term and 110,000 AUD which you don't want for the long term. The fact that the AUD are not worth very much each, at the end of the year, compared to what they're worth today, doesn't mean you have made profit.

You have assets worth 50,000 GBP today and if you hold them as pounds you will have assets worth 50,000 GBP at the end of the year. That is not, in any sense of the word, a 'profit' to someone who wants GBP for the long term because they live their life in pounds.

As an alternative to buying AUD at year end (which you don't want for the long term), you could exchange the 50,000 GBP which you want for the long term for the 10,000GBP which you want for the long term and a bunch of USD which you don't want for the long term or a bunch of bars of gold which you don't want for the long term. Just because those items might be cheaper than they are today, that's not a profit. That's just you standing there at year end and wondering if you should buy things you don't really need for the long term, because they look cheap and you hope to sell them for more in future years. Speculation.

You say you want GBP but 'not at any cost'. Tough. Effectively. you have 50,000 GBP here and now, today, whether you choose to see it as GBP or not and whether you bother to convert it to GBP or not. Whether you like it or not, it's worth 50,000 today. If you keep it in any other currency it might be worth more or less than 50,000 when you next look at it. So, to avoid potential losses from the 50,000 GBP value that you have today, I agree that it probably makes sense to do the conversion and get your hands on the 50,000 GBP.

I think it's probably unwise to hold on to my AUD in the meantime because it will probably depreciate further and may take a long time to bounce back.

I agree that it is probably unwise to hold your AUD which you don't ultimately want, to speculate on it bouncing back.