Why does it make a difference when you buy or sell currency?
Because at different times the rates you achieve will be vary considerably. If the market is up you could get 1.35 USD for every 1 GBP – great news if you are buying US dollars, less good if you are selling. (The current rate is 1.27 as of the writing of this article)
Finding the right time to buy or sell currency could make 0.05 of a pound difference – which may not sound like much but that is 5% – and 5% of a million dollars is $50,000. This is just a minor fluctuation between two major trading currencies. More variable currencies could gain, or lose you 10% even 15% if you just waited one more week, or bought a day earlier…
What drives market fluctuations?
Everything does. It may sound trite but political change, a new company floating on the stock market, a shortage or glut of a particular product or raw material, a natural disaster, anything can and does affect the markets. New US sanctions against China could affect not only USD vs Chinese Yuan(CNY) but also USD vs GBP, CNY vs GBP, CNY vs Japanese Yen and others.
Markets are nervous as a rule – any uncertainty, whether political or economic, will influence what the market thinks about the attractiveness of a currency. Other factors that impact the markets include: economic growth, relative inflation rates, and interest rates.
So, when is the Best Time to Buy Foreign Currency?
Unfortunately, no-one can predict the markets, there are too many factors that can influence them. The safest thing to do in terms of predictability is to trade today!
However, trading today could leave you seeing the market turn in your favour tomorrow and wishing you had waited one more day (or equally feeling smug as the market turns against you…).
The best way to use the market fluctuations is to set up your transactions to take advantage of movement in your favour whilst using an FX Tool to mitigate your risks in case it goes the other way.
You can use specialist tools like market orders, set up to buy at your ideal price if it is reached with a stop clause that makes sure you stay within your planned budget if it goes the other way.
For example, if you want to buy £1m in USD and today it is at 1.28 you could set up a Market Order to buy at 1.31 if the market goes that far up, but a stop loss clause to buy at 1.27 if it goes against you so you know your worst-case scenario. Aside from the planning benefits you will also protect yourself from sudden movements that could leave you having to buy your currency at 1.23 if the market moves fast just before you need your USD.
When to take a risk and when to play it safe?
The key to a successful FX strategy is in balancing what is right for your business. How much risk are you willing to take? For what potential reward?
An FX Specialist will help you to work out what you can afford to risk and how you can best take advantage of market fluctuations within any fixed timescales you have for paying suppliers or transferring currencies. Contact CentralFX today for details.