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‘Currency matters’ when buying property abroad

Tuesday 12th March 2013

When investing in a home overseas, many people fail to take into consideration the impact that fluctuating exchange rates can have on the price of a home, so this week we have decided to take a glance at ‘currency’ matters.

The property market in the USA, for instance, has been rapidly improving, with property prices appreciating across many parts of the country in recent months. But aside from higher property prices, Brits have also had to deal with the depreciating strength of the UK pound against the dollar, which currently stands at $1.49, representing a major decline on the almost $2 to £1 achievable in 2007. This means that now is potentially not a great time to negotiate a property deal in the States.

It’s also worth recalling that there are a number of countries whose currencies are pegged to the US dollar at a fixed rate of $2 to US$1, including countries in the Caribbean, Central and South America, UAE… offering weaker bargaining power.

Yet there are signs that the US dollar may actually strengthen against the UK pound later this year. If this proves to be the case, then even if the price of a property purchased now in America, or anywhere pegged to the dollar, remains static, investors and second homeowners will make a loss from the weakened exchange rate, assuming funds are repatriated back into the UK.

If you do not plan to buy property in the States now, but may do so within the next couple of years, you could consider taking out Forward Contracts, a tool to freeze exchange rates, rather than gamble on volatile currency markets. 

US Dolar:
GBP/USD has been steady these last 24 hours, according to UKForex. It’s traded a range between 1.4860 (a 2.5 year low) and 1.4940 post US NFP on Friday afternoon. There was little by way of economic data yesterday but sentiment towards the pound, the contrasting prospects for monetary policy from the US Fed and Bank of England and the run of strong labour data from the US recently is likely to keep cable on the back foot and even under 1.5000 for the foreseeable future. UK manufacturing and trade balance data is up today at 9:30 and if any weaker than expected it could mean GBP/USD tests yet further lows. The pound opens this morning at 1.4902 vs. the USD, a little off of its recent lows after risk appetite has improved mildly through the Asian session.

Euro:
Little happened in EUR/USD yesterday and overnight. It’s traded a narrow 30-40 pip range. It’ been either side of the 1.3000 big figure over this time and remains lowly after French Industrial Production printed below market expectations yesterday; coming in at -1.2% m/m vs. expectations for -0.1%. The German trade balance was also announced and showed the country’s surplus to be $15.7 billion vs. expectations for $17.9 billion. Neither release had much of an effect on the single currency. Near term EUR/USD is unlikely to make a convincing break above 1.3000, this as Italian bond yields edge higher in response to the inconclusive Italian election result in February and the Fitch downgrade last week. EUR/GBP has climbed ever so slightly on the mild euro negative sentiment and after starting the day yesterday at .8700 it opens this morning at .8730.

Aussie and Kiwi Dollars:
The commodity currencies have made small gains overnight as risk appetite in Asia has turned a little more positive, although not for any particular reason. In data released overnight business confidence (gathered by NAB) showed a slight pull back in February, although it was up on late 2012. It was largely shrugged off though. NZD/USD tracked its cousin higher and ended up trading to a high of .8272. The NZ finance minister was on the wires yesterday though and referred to the recent drought in the country potentially having a detrimental impact on the country’s GDP. The kiwi has fallen slightly in response to these comments. GBP/AUD has fallen to open the London session at 1.4495 whilst GBP/NZD trades at 1.8090 currently.

              

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