AUD rate Forecast 2014 – How can you protect yourself?

Risk Appetite Returns, Leading to AUD Strength

What can we expect on the Aussie in 2014? It would appear exchange rates are set to rise higher as the  Australian dollar gets weaker. Just what will cause this and how can you protect yourself?

In 2013 GBPAUD moved 21%. On a £400,000 transfer you would be looking at a difference of 151,776 AUD between the highs and lows buying and selling. This is a quite frankly ridiculously large sum and just shows the importance of taking the time to make some careful plans regarding your currency exchange. The sad reality is that I have had clients selling a property in Australia to return to the UK struggling to find the capital to fund their new UK house purchase. Luckily we offer an option to avoid this which is increasingly popular.

Overview

Many are negative on the Australian dollar for 2014 and this is understandable. International demand for their raw materials which has been a major driver of the Australian economy is down. This has taken the shine off the Australian and where currency speculators had been piling in to capitalise on higher interest rates, they are now concerned and selling off positions reflecting new attitudes and sentiments. This sentiment is highly likely to remain in 2014 and may yet get worse particularly against the pound which has received a boost in recent months.

GBPAUD. I expect further interest rate cuts down under and with the UK ebbing close to raising rates, expect this pair to head higher. 3 month forecast 1.78-1.90. 

EURAUD. Continued Australian dollar weakness will outweigh any troubles in Europe so I expect the rate to push yet higher still. 3 month forecast 1.47-.1.60

How can I protect myself?

Earlier I discussed the negative effects on such wild movements on those considering property transactions, particularly those selling down under and buying in the UK. One way to mitigate these losses is the use of a ‘forward contract’. This allows you to fix an exchange rate for a future date by paying a small deposit to reserve the rate for settlement in the future. These types of contract can be used over the course of a year and are the only way to remove the risk from the market. It is hopeless to spend hours negotiating on buying a property only for exchange rate fluctuations to wipe out profits or completely disrupt plans to buy overseas.

Here is an example with Mr A and Mr B both selling a 300,000 AUD Australian property and coming back to the UK last year. Both agreed sales in October with December completions. Mr A fixed on a forward contract to provide some certainty on exchange rates whilst Mr B decided to take a punt on the exchange rate. Mr A fixed at a rate of 1.70 meaning he got £176470.59. Mr B found that rates deteriorated as we predicted and ended up receiving £159,894.73 finding rates a bit closer to 1.90 (1.88).

Mr A and his wife were very happy approaching Christmas knowing exactly what to budget for with their UK purchase whilst Mr B had many a sleepless night arguing with his wife about which option he should have chosen!

Whilst the situation here may be fictional here the difference in currency of £16,500 is not. If you would like to learn more about the various options for buying and selling Australian dollars in 2014 and beyond please feel free to contact me  on [email protected] or call (+44) 01494 787 478 and ask to speak to me Jonathan