The currency markets are always open and are not restricted by exchanges like the London Stock Exchange for stocks for example. So, if you still have to convert money and send it abroad what should you be especially mindful of. We’ve put together a Q&A with some currency transfer providers to help answer the most common questions.
Will it be more expensive to convert large amounts of currency?
It may be a little bit more expensive, both from fees and the devaluations of GBP against stronger currencies like the USD and EUR. However, the UK has a relatively strong economy so it will be cheaper against other currencies with weak economies.
The underlying exchange rate spreads the banks quote each other will not be that much wider for people trading forex, but any increase in underlying spreads, may be passed on and multiplied the further down the supply chain you go.
So it is always worth checking the live rates online. This is imparticular true when converting money over the phone. Prices don’t stand still that long in normal currency markets as it is, so if your currency broker is having to relay a price to you over the phone, then wait for a decision from you to say yes or no to trade before they execute, the price quoted may be a little bit further away from the mid-market to offer to compensate for additional volatility.
To mitigate this, what you can do is ask your currency broker to confirm their mark up, or margin, or spread as a percentage or pips and ask to deal at the market price and be marked up later.
Depending on the size of the transaction, the mark up (or whatever they call it) from a currency broker should be between 0.1% and 1%, although, the norm now is around 0.25%.
Should you use a currency broker or your bank for international currency transfers in highly volatile markets?
This really boils down to “counterparty risk” and pricing.
Counterparty risk, means that there are far fewer people involved if you use your bank. The money goes straight from your account to whoever you are sending it to. You don’t run the risk of withdrawing funds from your bank account to a currency broker, for the currency broker to send it on to the beneficiary. Funds held with currency brokers are held in segregated accounts, but not protected by the FSCS.
If you want more protection for your money it will cost you more to convert it and send it through your traditional high street banks who can still charge up to 4% for international payments.
However, the new breed of digital banks like Starling Bank and Revolut (where funds are protected by the FSCS up to £85k), charge much less for international payments.
Lucy Smith from Starling Bank told us:
We continue to offer our customer fast and secure money transfers to bank accounts in 38 countries worldwide, with no hidden fees. This can be done quickly and easily via the Starling Bank app and our exchange rates and fees remain as some of the best on the market.
Will you be limited to the amount of money you can send abroad during volatile markets and COVID-19?
The currency market is the largest market in the world with trillions traded daily. The only issue will be liquidity for very large trades in the tens of millions. If you are converting, thousands, a few hundred thousand or even millions there should not be any liquidity issues outside normal limits.
Lucy Smith from Starling Bank told us:
There are no limits to transactions as long as the funds are in your account. Customers can make an immediate domestic payment (we are part of the UK’s Faster Payments network) of up to £25,000 per transaction, and an international payment of up to £10,000 per transaction. In a calendar day, you can send payments up to £25,000, of which a maximum of £10,000 can be international. If a customer needs to make a payment for a higher value, then they can get in touch with our 24/7 Customer Service team.
Nowadays, almost all businesses including big banks will generally have disaster recovery sites to work from and a well-established network and process for business continuity. However, the smaller brokers may find it hard to continue to cope with additional volume or particularly volatile markets.
Colin Lawrence from TorFX told the Good Money Guide:
During some trading conditions (high volatility), many brokers suspend trading or even could close altogether! Our group is committed to maintain 24/7 coverage, that said rates can be priced wider than standard levels in order to ensure price booked can be honoured.
What about hedging currency exposure with a currency forward to protect yourself against further weakness in the GBP?
Currency forwards are an excellent tool for locking in an exchange rate for up to a year. If you only have a set amount of GBP to spend and don’t want to risk paying more for a set amount of EUR or USD, then you can buy a set amount of currency now and pay for it at a later date. This reduces the risk of paying more.
The upside is clear, however, the downside is that if the GBP strengthens again, you could have paid less for the EUR or USD if you had waited until the rate rose again. The issue is that no-one really knows where currency prices are going to go. Even when the market are not volatile.
Mark Phipps from Linear International Payments said of currency forwards:
If you are on the right side of the recent aggressive moves then forward contracts would certainly make sense to buyers or sellers. Just be mindful of any possible variation margin calls over the duration of your contract and how this may affect your cash flow. Also make sure all your future requirements are certain before locking in.
Generally the max of a forward is one year at the moment. Some may allow further but that is really down to risk appetite. Also deposit requirements may vary in these uncertain times and low deposit credit lines are a lot less likely to be given.
The quick answer is that in times of crisis, the USD will generally be considered one of the strongest currencies because that’s how the world sees its economy. But, there is no way to predict where currencies are going to go.
Adam Solomon head of trading at TorFX had this to say about what could potentially happen to Sterling around Coronvirus:
Through the crisis up to this point the Pound has been behaving like a risk sensitive currency. The correlation between the global sell off of share prices coincides with the weakness in Sterling. It’s the strong U.S Dollar that is driving it. Because the Pound is weakening at a faster rate against the US Dollar than the Euro is currently, the Euro has also made big gains versus the Pound. It’s different to 2008 in that this is not a market driven problem and no matter how much money governments and central banks sling at the problem, it won’t stop people contracting the virus. We can expect more volatility in global share prices in the coming days and weeks and the Pound will likely be a barometer for this type of risk.
If you have an upcoming currency transfer you can compare currency brokers here.
Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.