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How the Economy Affects Money Transfers

History is filled with economic and political events, which have had a huge affect on the economy. This impacts the country’s currency, and as a result the exchange rate. 

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How the Economy Affects Money Transfers

All money transfers are based on the exchange rate. Exchange rates are dependent upon the value of a currency, and when the value of a currency is low, the exchange rate is also low. If the economy is unstable, it is more likely that countries will have a weaker currency, which in turn affects money transfers. There are several factors that impact currencies, such as inflation, interest rates, national debt, and more. Therefore, it is important that when people transfer money from one country to another, they understand what is taking place in the economy of both countries.

Key Economic Events That Have Affected Money Transfers

The European Debt Crisis: In 2008, the Eurozone had its biggest crisis; countries had to borrow money to get out of debt which led to a severe recession and the collapse of the economy. As a result, several regulations were introduced which transformed the landscape of the Eurozone’s financial system. The Euro as well as other currencies in Europe started fluctuating and the value of the Euro is still suffering the consequences. 

Brexit Decision: In 2016, fifty one percent of the British public voted to leave the European Union. The referendum held on 23 June was named Brexit and this decision had a negative effect on the British pound. It immediately fell from 1.34 against the Dollar to 1.24 against the Euro, and so far, has dropped to as low as 1.13 against the Euro. Many other currencies were affected by Brexit including the Canadian dollar, the Australian Dollar, and the US dollar. 

The Nixon Shock: The Bretton Woods system was designed to stabilise economies after the two world wars. However, this changed in 1971 after the agreement was unilaterally terminated by president Nixon. The United States dollar became a free-floating currency, and a short while later, the pound experienced the same fate. As a result, there was a dramatic negative impact on all major currencies. 

The 2011 Earthquake in Japan: Natural disasters also have an effect on currency values. The earthquake in Japan was the worst to hit the country in over a hundred years. While the initial damage to the economy was severe and the value of the Yen dropped significantly, it eventually experienced a massive boost with overseas insurance and repatriation. Today the Yen is one of the most powerful currencies in the world. 

How Forward Contracts Can Manage Economic Risks

The purpose of visiting history is to ensure that we don’t make the same mistakes. In terms of the economy, we must pay attention to what financial experts are predicting about future events. One of the most effective ways of managing risk against economic events is to set up a forward contract. A forward contract involves locking in an exchange rate at its current price so that the rate is not affected by future fluctuations.

Advantages and disadvantages of Forward contacts

Using a forward contract to lock in your exchange rate is ideal for people who are planning on spending large amounts of foreign currency in the future. For example, if you intend on retiring to Italy in two years but you are concerned that the sterling might decline against the Euro before you relocate, you can fix the exchange rate. 

By fixing your exchange rate, you will know exactly how much foreign currency you will receive in advance. A fixed contract also gives you a sense of security knowing that you are protected against any fluctuations.

The only disadvantage to a fixed contract is that once the rate is fixed, if the exchange rate goes up, you will not benefit from the increase. Therefore, it is important to pay attention to exchange rates and lock your rate in when your currency is at its strongest.

Summary

Economic unrest, political turmoil and war are just some of the events that can have a catastrophic effect on the currency markets. Much of a currency’s value is determined by the economic stability of the nation and any economic instability will have a detrimental effect on the currency. Although it is almost impossible to prepare for the unexpected, you can always secure your foreign exchange rates with a fixed contract, which will protect you against currency fluctuations.

Manage economic risk with OFX

OFX’s Forward Exchange Contracts let you buy currencies now but transfer later. This lets you lock in a great rate even if you aren’t ready to transfer your money immediately. Whether you need to book your transfer two days from now or a year from now, you’ll be protected against exchange rate fluctuations.