Is Now The Right Time To Buy?
Last month saw Sterling go through a seven-year high against the Euro, breaking 1.31 in response to a shock announcement from the Swiss National Bank, declaring it would no longer keep its Franc-Euro currency peg.
With EU unemployment near record highs and a collapse in global oil prices, the risk of a deflationary spiral looms over the Eurozone too. All eyes are on the European Central Bank’s President, Mario Draghi and whether or not he will roll out a full-blown Quantitative Easing program in 2015, involving the purchase of sovereign debt to create further stimulus for the trade union economy. Reports from Frankfurt suggest the purchases will amount to €50bn (£38bn) a month until the end of 2016. Some reports suggest it could start as soon as March, which would put the scheme’s size at nearly €1.1trillion.
The monetary policy outlook for the EU is a sharp contrast to the likes of the USA and neighbouring UK, and lays the foundation for a weaker Euro in the coming year. Weakness in the Euro is likely to be most pronounced against the US Dollar, due to the expectation that the Fed will seek to tighten its belt sometime in 2015. Recent Fed minutes published a mixed tone and failed to give markets further impetus. They highlighted that while there was agreement that the trajectory of the US economy looked positive, likely leading to additional job gains, there are growing concerns that low inflation could prove resilient. The Fed pointed to a rate hike in 2015, leaving the US Dollar’s strength intact.
Across the Atlantic, a sudden drop in inflation, low wage growth and the rise of a supermarket price war has lead the Bank of England (BoE) to hold back on any possible monetary policy tightening. The Office of National Statistics (ONS) announced that UK consumer prices halved from 1.0% to 0.5% in the final month of 2014, its lowest level since the year 2000. Typically, softer inflation is less likely to promote higher interest rates and would be expected to weigh on the strength of the Sterling. Previously, two members of the Monetary Policy Committee (MPC) had voted for rates to rise by 0.25%. But Ian McCafferty and Martin Wale changed their minds in January to join the other seven members in voting for rates to stay at rock bottom. Sterling finds itself on the back foot and further risk can be found in the uncertainty of this May’s general election and how its result may frame the UK’s relationship with mainland Europe.
Frequent fluctuations in exchange rates ensure currency brokers work tirelessly in order to minimize the risk for their clients. It is not uncommon for currency pairs to see swings of 20% or more within any calendar year, adding risk and uncertainty. However, there are tools that can be offered that can protect clients from currency movements, avoiding unexpected costs. Specialist brokers, like Cambridge Mercantile, fix the exchange rate now for use in the future for many thousands of clients using forward contracts, avoiding all fees and charges.
Fixing the rate of exchange at the time of agreeing to buying a property and locking the rate for completion enables you to establish the cost of that property, with no fluctuations in the price. With low worldwide interest rates this type of contract is safe and very cost effective.
Locking your exchange rate with a forward contract isn’t about gambling on which way the rate will go but about removing the uncertainty. If you decide to fix it, there’s the risk it could rise. If you decide not to fix it, the rate could go down. There’s a risk both ways. The point of the forward contract is to guard against the risk of things going the wrong way. Think of it in similar terms to a fixed rate mortgage. With the Pound over three cents better off than it was in the first week of 2015, a property in Spain costing €500,000 would, at the time of writing, cost the British investor £382,000 compared to £391,000, a saving of £9,000!
In Autumn 2014, Osborne’s stamp duty revolution cut duty for ordinary house buyers and hiked it for the richest. The Chancellor turned the 300-year-old duty into a virtual “mansion tax”. New rates introduced of 5% between £250,000 and £925,000, 10% up to £1.5m and 12% over that. People are again re-visiting the idea of buying a place abroad, cashing in along the way by the recent strength of the Pound. By locking in the rate now using forward contracts some will be gaining from this strength for many more months.