You’re about to go on holiday and it’s time to purchase your travel money. But when you do, you realise the exchange rate has suddenly gone down, and you wind up getting less than you expected for your holiday. With a little less spending money in your pocket, that fancy dinner in Italy or the sightseeing tour in San Francisco that you were dreaming of will now have to be replaced with a street pizza or a free (hilly) walking tour.
Volatility in exchange rates has caught many travellers unawares, and our team of FXperts across Australia often get asked by their customers – ‘why?’ or ‘what happened?’
Well, sometimes politics is what happened!
To many of us, politics is boring and we think it is largely irrelevant to our everyday lives, and that we only need to pay attention at election time. However, you don’t need to be a politics buff to understand that government decisions can affect a lot of things that are relevant to you – including how much travel money you might have available to spend for your holiday.
If you want to maximise your holiday spending money, it can help to have an understanding of exchange rate volatility – what can make exchange rates go up and down - and political decisions – both at home and overseas – can, and do, impact foreign exchange rates. Because it is sometimes boring, and sometimes complicated, we have tried to break it all down for you so you can make some sense of it all and take away some tips that may help you minimise the impact of any volatility on your foreign exchange.
First up it helps to understand how exchange rates work and how they can impact your holiday money.
The amount of money you have to spend on your holiday really comes down to two things – how much money you have saved, and the exchange rate.
For example, if you are going to Italy on a holiday and need to exchange Australian dollars (code: AUD) for Euros (code: EUR):
If you have AUD$2000 spending money for your holiday, you multiply that by the Euro exchange rate available on the day, and that will let you know how much spending money you will be able to exchange for in Euros on that day.
You obviously have full control over the first part – how much you save. But the same can’t be said for the second part, the exchange rate, as this is affected by a lot of factors outside of your control.
Exchange rates move around daily, and sometimes even by the minute, because the foreign exchange market is traded on 24/7, all over the world. The exchange rate available each day will determine how much 1 AUD will buy in another currency, say the EUR.
Just take a look at the below graph, showing the exchange rate between the AUD and the EUR over the last month.
See all the ups and downs? The overall trend?
On 28 January 2017, 1AUD would get you 0.6707EUR^. On 15 February, 1AUD would get you 0.688EUR^. That doesn’t seem like a lot, but if you had exchanged AUD$1000 on 28 January, you would have received €670.70. However, if you had exchanged the same amount nearly a month later, you would have received €688 – nearly €18 more. And obviously, the more you exchange, the bigger that difference would be.
Clearly, a day, two weeks, or even month can make a big difference as to how much money you have to spend on your holiday. But what makes the exchange rate go up and down like this?
One major reason for currencies moving up and down is because they are traded on the foreign exchange market using a ‘floating exchange rate’ (for more information on this, read our blog post “Foreign Currency Explained”. This means the currency is bought and sold on the international market using a supply and demand system. The more in-demand a currency is, the more it will cost an investor. And, in return, the value of the currency will drop if it isn’t in demand, to try and entice investors.
Investors want to buy currencies that they think will go up in value – it’s obviously how they make money from their investments. So they look for signals that the value of a currency will go up or down in the near future.
Some of these signals include the economic growth of a country; the country’s economic environment (like consumer behaviours or trading partners); trading data on stock exchanges; and government policy and how it impacts the country’s economic conditions.
In the currency market, changes (good or bad) to a country’s economy can trigger an increase or decrease in the value of that country’s currency, and it is these triggers that investors look out for. These changes are usually reflected in economic data that is released by economists, and which can lead to changes in exchange rate forecasts and a change in the demand for a currency.
Examples of economic data that might impact exchange rates include:
So, if the Australian government was to release unemployment figures that show unemployment has increased in the last 5 years, this may signal to investors that there has been a slowdown in the economy, and declining confidence in economic growth may mean investors won’t want to buy the Aussie dollar because they don’t think it will increase in value. This can, in turn, lead to lower demand for the Australian dollar, and therefore a decline in its value.
There are a number of factors that can cause exchange rates to move up or down, but as you can see, economic factors clearly can have a very big influence.
So, we’ve had a look at how economic data can impact the perceived value of a currency, and how this value is then reflected in the exchange rate between one currency and another. We’ve also looked at how this exchange rate might impact your travel money, showing that there can be a clear link between economic data and your travel money.
Now, let’s look at how politics – government policy and decisions – can impact the economic factors that relate to the up and down movements of a currency.
Firstly, let’s look at how it can have an indirect impact – for example, where government policy has been established with the intention of achieving one goal, but has also indirectly affected the value of a country’s exchange rate.
In the USA, President Trump has (very loudly) stated his intention to reduce imports from Mexico into the USA. This political decision was made to try increase jobs in America by not relying on goods made elsewhere (the main goal of the policy), but it has also indirectly had a major impact on the value of the Mexican Peso. More than 70% of Mexico’s exports go to America, so with their economic stability and growth threatened by Trump’s policy (as well as many Mexican jobs), the value of the Peso has gone down.
Our historical rate chart shows you how, six months ago, the rate of AUD to MXN was 1AUD = 11.0105 MXN. A month later, on 28 February, it was up to 1AUD = 11.99264MXN. So any Aussie travellers to Mexico exchanging their currencies now are getting around 9% more pesos for their Aussie dollars.
Governments can also try to indirectly manage exchange rates, because they have a vested interest in setting what they believe the ‘target’ value of their currency should be.
In Australia, we rely heavily on our exports for economic growth, so it’s actually not good to have a strong Aussie dollar that pushes the prices of our exports up – the countries buying our coal, iron ore or wheat don’t want to pay high prices for their goods and will go elsewhere if they can find it cheaper.
The Reserve Bank of Australia (RBA) will work towards a target value for the Australian dollar that supports economic growth through exports. Unfortunately, this doesn’t work so well for travellers that want a strong Aussie dollar so that they can get a higher USD exchange rate - say $0.80 or $0.90USD, instead of $0.70USD.
The RBA or the Australian government can therefore indirectly impact exchange rates through any monetary policies that relate to the management of the Australian dollar.
A government can also directly manage exchange rates, for example, by deciding to ‘peg’ the rate of their currency to that of another. For example, Argentina has pegged the value of their Peso to the value of the US dollar, so the value of the Peso is fixed to the value of the US dollar, and is affected by the rises and falls of the USD.
We have seen how a government can directly or indirectly impact the value of a currency, and in turn its exchange rate, through economic policy, decisions and data. And we know that exchange rates are a big determining factor when it comes to how much money we have available for spending on our holiday. So, is there a way to protect your travel money from being negatively impacted by political and economic factors?
Short of becoming Prime Minister and making your own political decisions, there isn’t a lot you can do besides planning ahead and trying to minimise your exposure to market volatility.
To achieve this we encourage you to plan ahead:
When you are ready to purchase your foreign currency, something else to consider is whether you are being charged fees and commissions because, if you are, this will also eat away at your overall exchange amount. At Travel Money Oz, we don’t charge fees or commissions on foreign exchange cash transactions, so the exchange rate you see is the one you get – you won’t find any extras sneakily added on when it comes time to pay.
We hope this blog post helped to outline the links between political decisions and policies, economic growth and data, exchange rates, and ultimately how they can all affect your travel money! It may not be the most exciting topic in the world, but politics is relevant, and it does have an impact. If you want to make the most of your holiday spending money, it can pay to have an understanding of what might make exchange rates go up and down so you can try minimise the impact any downs may have on your holiday budget.
*Exchange rate available on 19/02/2017 from www.travelmoneyoz.com. ^Exchange rate available on www.travelmoneyoz.com on 17 January 2017 and 28 February 2017, as per historical data available on http://www.travelmoneyoz.com/foreign-currency.
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