The Pound, Dollar and Your Dream Home in Florida - is Now a Good Time to Exchange Currency?

If you are looking to buy a holiday home in the U.S, in somewhere like Florida, you are going to need US dollars, and to get those you are going to have to exchange British pounds.

However, you might be asking yourself whether now is the right time to act given the pound to dollar exchange rate's poor performance of late.

Sterling has lost over 10% against the dollar since June 2015, so the answer would seem to be “No, now is not the right time.”

Many would argue the pound must be approaching a bottom; wait a little and you might get a much better exchange rate.

Yet, there is also a risk of hanging on too long and with the danger that the pound will weaken further, particularly if the country votes to leave the EU at the June 23 referendum.

Pound to Lose 15-20% if Brexit

Some forecasters, such as Wolfson Prize-winning, Roger Bootle of Capital Economics, expect the pound to shed 15% of its value in the event of a Brexit, whilst HSBC’s head of FX Strategy David Bloom forecasts the pound to lose even more - between 15 and 20%.

So although the pound is cheap now, there is a risk it could get even cheaper as a result of a win for the ‘out’ vote.

Nevertheless, if you were a betting man you might be putting money on Britain staying in the EU as most betting agencies see staying as odds on favourite. In addition, economists at U.S investment bank Morgan Stanley view the probability of the U.K staying at 65%, whilst those at Swiss lender UBS put the chances at 60%.

If the odds favour the UK staying in the EU, how would that impact the pound-to-dollar exchange rate?

A major part of sterling’s recent fall has actually been as a result of fears the UK will leave the EU, therefore a sizeable element ofBrexit risk has already been priced in to the exchange rate.

Analysts at Unicredit, HSBC and DNB Bank believe the pound is undervalued by between 7 and 10% solely because of Brexit concerns. In the event of those fears proving unfounded the exchange rate would probably immediately recoup those losses, rising by the same amount – between 7 and 10%.

Clearly for those looking to buy abroad such an evaluation in sterling would be a major bonus.

Morgan Stanley Forecast Sterling to Devalue Anyway

Looking beyond the referendum longer-term and analysts at Morgan Stanley actually expect GBP/USD to depreciate whether there is a Brexit or not, with the only difference the degree, and the trajectory in the short-term.

They forecast GBP/USD to fall to 1.25 by the end of 2017 regardless of Brexit, however, in the case of the U.K leaving the trajectory would be different, with a steep decline initially, followed by a small recovery, where as if the UK stays (as they expect) the rate will rise following the referendum before sliding lower again as economic reality bites.

“Concerns include a pro-cyclical fiscal policy, the important UK financial sector being challenged by globally low rates, increasing regulation pushing financial sector productivity lower, and a current account deficit fluctuating around 4%,” say Morgan Stanley.

Using Hedging Strategies

There are hedging strategies which can be used to side-step FX speculation and risk altogether.

If, for example, you are happy with the current exchange rate then one way to ‘lock in” today’s rate is to use a currency forward, which a broker will manage on your behalf. This will guarantee that on the day when you expect to make the exchange it will still be at today’s exchange rate.

Another way to limit sterling decline is to place a stop loss below a certain level - say just below the current 1.3835 GBP/USD lows and if the exchange rate weakens below that level the order will fill and the exchange will be made, enabling you to place a limit on your risk.

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