Wheat fields, hedges and baby cows all offer clues as to why you should talk to us about protecting your property budget from currency movements this spring.
As soon as the warm weather arrived this week, so did the strength of the pound. Could the two be related? Do the world’s currency markets suddenly perk up just because the sun has come out and the temperature’s hit a balmy 20 degrees?
Probably not. After all, the weather also improved on the Continent and the US and yet their currencies weakened. There may be a correlation between economics and weather patterns – both the Wall Street Crash of 1929 and the UK’s Black Monday in October 1987 followed just days after gales and hurricanes – but historically the pound has tended to weaken as often as it strengthens when the weather improves in the spring.
However, you can look to the land to see where we get many of our ideas and terminology on currencies. Moreover, these show how protecting your currency makes good sense.
Grow your hedge
You’ll hear the corporate world talk about “hedging” their currency. The phrase comes from the idea of literally planting a hedge around your land to protect it. In currencies we buy euros or dollars ahead of time at a rate we know is acceptable to protect us from future averse currency movements. We’ve put a hedge around our potential losses (but also our potential gains).
In farming, if you’re a wheat farmer who has just planted your summer crop, you have no way of knowing if fine weather will give you a bumper crop or if gales will wreck it the day before harvesting. What’s the solution? Sell it in advance, or “forwards”, to a merchant so that someone else takes on the risk. Sure, the merchant might do better than you and get a huge crop for less than the current market rate. But your income is protected whatever happens, even if the merchant has no crop to collect at all.
Protecting your property budget
If you’re buying a home abroad you’re faced with a similar situation to that farmer. When you commit to buying a property it’s like you’re sowing your crop, sealed with a deposit of 10% of the property value. But when you have to pay the other 90% months’ later, currency movements can have taken the price way out of your budget. Sure, the currency might have moved in your favour, but that’s a big risk. Making a forward contract with us protects your buying budget, effectively putting a hedge around it.
Which brings us to the pound. Which way will it go over the next few months? No-one knows exactly. Rather than weather effects, it is more likely that the rise this week was due to the hope that interest rates will rise in May. (The concept of interest on a loan, incidentally, is believed to hark back to the days when a loan might be of cows or other livestock. “Interest” was the calves born during the loan period. But that’s another story.)
The fact is, we know as much about the future of the pound as we do about whether we’ll get a barbecue summer or a total washout. So speak to us about protecting your buying budget. Then you can buy in a country with more sensible weather!