The sometimes wild fluctuations that blow across the currency markets can play havoc with planning, especially for overseas holidays.
For the two years until May 2013, the Australian dollar was trading at more than $US1.00, reaching highs around $US1.10. Since then, the currency has lost around 25 per cent of its value, falling to levels of around US86c and subsequently climbing back above 90c.
That means if you started planning a holiday in the US before the currency fell, you would have 25 per cent less to spend if your departure date had been late January, 2014. That is a big hole in your holiday budget, but the freedom of the foreign exchange markets does give you some options for managing currency risk.
The first thing to think about is how you are going to fund your holiday. If you plan to pay by credit card while you travel and worry about the bills later on, then you have no choice but to take pot luck with the currency movements.
However, if you have some savings, you can start thinking about hedging currency risks. If you feel the Aussie dollar is likely to weaken between now and your departure date, then you can convert some currency now and lock in a (hopefully) more attractive exchange rate.
Foreign currency accounts
The first way to do this is to open a foreign currency account with a bank. A quick run around of the most popular banks showed only the Commonwealth Bank and Bank of Melbourne offer foreign currency accounts for individuals. BoM’s foreign currency accounts have a minimum balance of $50,000, so for most Aussie travellers that is not really an option.
The Commonwealth Bank has no minimum balances and so creates a possibility for your average traveller. First, you need to go to the bank and do the necessary paper work to open an account. Then you are free to deposit funds.
There are a couple of ways of doing this. You can simply transfer funds from an existing bank account or roll cash out of a term deposit into whatever currency you need for your travels. But doing it through the bank has a downside, as individual customers face what are known as very wide spreads on currency exchange.
For example, at the time of writing the Aussie dollar was trading at about US89.55c but the major banks were offering to buy Aussie dollars at US85.56c from small customers, meaning you get about 4.5 per cent less for your Aussie dollars than the professional market is paying. If were you seeking to convert US dollars back to the Aussie at the end of your holiday, the exchange rate would be US94c giving you a return 4.9 per cent below the professional market price.
Alternatively, you can use a foreign exchange company like Ozforex and get a better deal. At the time of writing, Ozforex was quoting US87.43c for the Aussie dollar and so offering a better deal than going through the banks. Conversely, they would trade you out of the US into the Aussie at US91.59c, also an improvement on the bank rate. Ozforex’s minimum transaction size is $2000 and fees are $15 per transactions below $10,000 and no fees above this amount.
Once a dedicated forex company does your transaction, they move the foreign exchange into your bank account. After that you can move forex in and out of the account in cash, cheques or direct transfers. There is no interest paid on CBA forex accounts and fees of around one per cent are charged on withdrawals.
Travel money cards
Another handy option can be found in the travel money cards provided by most banks and forex companies including Ozforex and Travelex. These are essentially a debit card where you pay in cash and have it converted into the currency or currencies you will need while you travel.
While you travel, you can pay for your purchases using the card in the currency you choose, just as you would with an EFTPOS card at home. Most travel cards cost somewhere between $11 and $15 to establish and charge a fee for withdrawals. In ANZ’s case, the fee is $2.50. For HSBC, it’s $4.50.
Many card providers waive the three per cent transaction fee typically charged on foreign exchange purchases. Spreads vary on cards, with ANZ at the time of writing quoting US.85.69c on the buy side and US92.87c to sell. Ozforex card spreads were US86.68c and US92.66c.
Most cards offer conversion to the US, Canadian, New Zealand, Singapore and Hong Kong dollars, the UK pound, the euro, Japanese Yen and Thai baht. You can choose the timing of your conversions through the card according to your travel plans and your view on currencies.
David Simon, a partner with Westpac Financial Planning, says Exchange Traded Funds (ETF’S) now offer affordable currency hedging. Through your online broker you simply buy into an ETF denominated in the currency you want and trade back to the Aussie whenever you want to.
“It’s an effective and transparent method as they’re listed on the Australian Securities Exchange,” he says. An ETF trade costs about $30.
Remember the foreign exchange markets are notoriously volatile and any view you take could easily prove wrong.
Rod Myer is a personal finance writer based in Melbourne