A friend asked me a question today about whether this might be a good time to move money back from Ozzie dollars to Euros or whether they should be buying a house in Oz or in Ireland at the moment. This is a great question as it enables me to demonstrate how all this global macro stuff I keep annoying you about affects everyone no matter where you are. The last time my mates concerned themselves with anything even relevant to Aussie dollars was probably when they were scraping together a few foster dollars in the UCD student bar, but now the issue is more relevant as many of our friends and family are living down there owing to the issues that
Ireland has encountered over the last few years.
For many of our brothers and sisters down there sunning themselves they are stuck in a bit of a dichotomy, the AUD is strong relative to the Euro, the Ozzie house prices are very high relative to current Irish house prices and there are plenty of jobs around which not so the case in Ireland. Yet still depending on personal circumstances people are still looking at Ireland and thinking is now the time to move back money or is it better to wait.
What not a lot of people know when they look at the rate between AUD and Euro is that currently US fiscal policy is ruining your trade. You see the AUD is pegged to the USD and the Euro is pegged to the USD therefore you can infer the rate of AUR/EUR by comparing the two. So if currently AUD is trading at roughly parity with the USD after the recent 50bp rate cut then it stands to reason that it trades at roughly the same rate against the Euro as the USD does.
This is called a cross rate, i.e the FX market infers a rate of AUD/EUR by dividing the rate of AUD/USD & EUR/USD. Therefore is USD goes up it stands to reason that the AUD will go down but also the EUR will go down aswell therefore the AUD/EUR rate will move roughly the same as the EUR/USD rate…….anyone still following? Attached a Wikipedia article explaining the concept I won’t bore you with it more here. http://en.wikipedia.org/wiki/Currency_pair
So if you want to move your money from Australia to Ireland you need to have a view on what you think the USD will do in the near future. Arguably the Euro should be a whole lot lower than it currently trading due to the on-going crisis in the EZ. But the real fun happens when the US fed lowers interest rates in the US to zero and then prints truckloads of money to artificially stimulate the economy through a process called QUANTITAVE EASING. The Central bank of Europe are dead against doing this (for now) and have kept interest rates on hold at about 1% or so for the last while as they are terrified of inflation. So you have a situation where one currency is in a mess but the other is not in such a mess but has printed so many new dollars they have counteracted the weakness of the other currency by diluting their own.
In terms of is this a good time to move money or not my answer is simple, it’s as good a time as it has been for the last few years if you have to buy Euros, please note my use of the words “have to.” I would never pretend to advise anyone on any investment opinion, it is not a great idea to ever invest your hard earned money on someone else’s advice because ultimately you are to blame if and when it goes wrong, so please never take anything I say as investment advice, fortunately for those of you who know me my reputation precedes me and you would never take my advice anyway! If you had to move money back or were planning to move back to Ireland and were 100% committed to that decision then why wouldn’t now be a good time to move at least 50% of your money. What have you got to lose? You will be buying Euros in an around the cheapest they have been over the course of a few years. If Greece defaults or the FED turns around tomorrow and definitively ends quantitative easing or QE as it’s known then yes the Euro probably would weaken further, but you nor I have a crystal ball and have no idea what will happen tomorrow so you can only do what make sense for you now with all the given information at hand. If things get worse then you can pick your time at leisure to move the rest of the money and it they get better you can sleep better at night safe in the knowledge that you acted at the right time and saved yourself some money.
In terms of buying property right now, again that’s a personal choice but for me it’s clear as day, Ozzie house prices are high …..very high , Irish prices are low A LOT lower than they were and can still keep going lower but I know which place I will get value for money and which place I probably wont and it aint sunny in the place that I will. I’m like an elephant and won’t forget the pain that has happened over the last 4-5 years owing mainly to a global housing bubble. I will forever be sceptical of property as an investment. There are plenty of other assets out there I can try make money from but the house that I will live in will not be a tradable asset as far as I’m concerned.
One last point in FX is to be so careful where you change your money, banks these days charge a huge spread or commission, I once was charged a rate on a hotel bill paid on my credit card an fx rate that had not traded in the market for over a year. Needless to say my complaint was passed around and nothing ever changed. When changing money, read the papers and follow it on t.v. so that you have a good idea where the SPOT RATE is, this is the live price at any given time. If you think it’s too far away then haggle or simply go somewhere else. I know a good place to change money and it’s all online and it’s an Irish business if you need the name of it ask me and I will send on the details. Do not let the banks rip you off it’s the most liquid market in the world there is no reason they should not be as close to spot as possible.