How to Save Thousands on Currency Exchange Augustin Eden, Market Analyst

Getting familiar with foreign exchange For years, the consumer has been given a rotten deal by banks when it comes to exchanging currency and wiring funds internationally. Many still use banks since it seems like the logical thing to do - it's straightforward and the bank can easily send money to any desired destination for you, be that your own bank account in a different country or a foreign recipient. The problem is that banks can and do charge pretty much whatever they like for this service. It’s an industry that’s ripe for being shaken up. Perhaps a member of the family has gone abroad to study or volunteer. You may even be sending money back home. Or Maybe you're importing a new car, buying that dream property in France, paying your tailor in New Delhi for that suit or settling up with Sotheby's in New York for that engagement ring you just couldn't find anywhere else. Whatever your situation, exchanging and transferring money will be a part of the process so the subject is an important one. The foreign exchange markets have evolved over the past few years in terms of access not only for the retail customer, but also for disruptive business models aiming to challenge the status quo and offer something better in terms of currency exchange. The hitherto high costs involved are now all but unnecessary – yet banks have still been allowed to impose exorbitant rates on their customers, independent of where any given currency is actually trading at that moment. Consumers get such a bad deal with the banks and technology has come so far in the past few years that it’s now possible to save thousands on currency exchange.

Why do people get a bad deal currently? Banks buy and sell currency between themselves on what is known as the 'interbank market.' This has two sub-markets: the spot market, the forward market. The spot market is used for buying and selling currencies for immediate delivery, whereas the forward market is an informal one by which agreements are made to buy or sell currencies for future delivery. Brokers act as intermediaries between buyers and sellers of currencies - those being businesses that need to pay suppliers in another country, retail clients transferring 1

funds abroad and currency traders that simply want to speculate, as well as connecting all of these to the banks themselves.

How do people make money in this industry? Explicit commission is a thing of the past. The way a bank or currency exchange broker makes money nowadays is simply by adding a margin to the buy and sell price of the currency in question. For example, if the 'spot' rate for GBP/USD is 1.5 (that is £1 buys the bank $1.50), your bank might offer you 1.4. That’s a difference of 10 cents for every pound. If you were exchanging £100,000 with the bank, you’d receive $140,000. But the exchange rate was actually 1.5. The bank has just made £10,000. Furthermore, banks will also charge a handling fee when you send funds or withdraw them abroad. Where did the bank get that 1.4 exchange rate? It knows the spot rate is 1.5 – it’s a bank – but being a bank it simply places a large margin either side of the market rate. Granted, there are costs involved in transferring money between point A and B, but with the evolution of technology and the plethora of new businesses that have addressed the challenge of international fund transfers, it's now no longer necessary to place such large margins either side of the spot rate. What's really shaken things up of late is that businesses and individuals can now get access to the same market that the banks use to trade currencies, via alternative currency exchange companies with lower overheads and innovative business models. These players are challenging the old, bank-centric model. There is now a booming currency exchange market out there that's highly competitive. Customers can get a much better deal by shopping around - they could literally save thousands. New, inventive service providers such as Accendo FX, based in the City of London, have direct access to the interbank market and will actively work to give you the best exchange rate by constantly monitoring the market. Onward transfer of funds is free. New business models are based on volume – charging less than the incumbent banks (and just being a bit nicer) in the knowledge they'll acquire more customers that way. The new breed is friendlier, offering dedicated account managers who returning customers can get to know. Processes have been re-designed to be as easy as possible for the customer. For example, when you want to exchange currency, you now simply call your account manager and talk! They can accommodate requests in both the spot and forward markets, since they have unfettered access. Sound old fashioned? Well, yes, it is! And it appears that this oldfashioned approach, supported by innovative thinking and the latest technology, is proving hugely popular. 2

How does this new breed make money? It's a valid question with a simple answer. Companies like Accendo FX just place a smaller margin either side of the spot rate than the banks do, that's all. Forward contracts depend on a more detailed analysis of the FX markets, but the overall concept is the same. Constant market analysis is key. If you’re interested, Accendo FX will even teach you how to analyse the currency markets yourself. Call it empowerment, I guess! The team there uses the tools of technical analysis to forecast currency moves, which in turn ensures clients get the best rates available. With the educational component thrown in, there really is nowhere to hide which is obviously a positive for the consumer. With this in mind, I asked the research team at Accendo FX for a 'technical analysis primer' - the type of thing they might send an interested client (don't be put off by the word 'technical'...!).

3

How you can forecast where the market might go next If the chart below referred to an FX pair, there are a number of instances whereby you could attempt to forecast future price moves. At the bottom of the chart are three smaller charts. These are known as indicators. There are literally hundreds of indicators – too many to explain in this guide, but let’s nonetheless take a look at the chart below which illustrates how we would use indicators to forecast the FX markets.

The first thing we would observe is that the FX pair in question has spent much of the time trading in a range – the price moves up and down regularly between two trend lines acting as 'support' and 'resistance.' Look at the areas labelled 1 and 2. If you then look directly below to the top indicator – “Stoch”, short for Stochastic – you’ll see there are green and red circles where the Stochastic indicator goes below 20 and above 80 respectively. You’ll notice that it never stays in either position for very long and is often a sign that a change of price trend is imminent. See if you can find some other instances where this is the case. Another feature displayed by indicators is ‘divergence.’ This happens when the price makes a new high or low, while the indicator fails to make a new high or low. Again, when this is the case a change of trend often follows. See the areas labelled 3 and 4 and compare with 4

the price chart directly above. In this case, two indicators (Stochastic and RSI) have given the same signal. Lastly, the lower indicator labelled ‘Momentum’ can also tell us something about where prices are headed next. The price crosses the upper boundary of its range on 18 May – labelled 5. At the same time the Momentum indicator moves up through its 2-week high of 4.11. This is a bullish signal, and you can see where the price goes subsequently. Moves such as this, where the price moves through a significant level of resistance or support, are known as ‘Breakouts’ and form part of many a trading strategy. Importantly, one must remember that accurately forecasting the future is never a fail-safe activity. If it were, there would be no financial markets! Currency traders simply use the above tools to increase their 'edge' over the wider market.

Using the trader's toolbox to get the best exchange rate While the team at Accendo FX is quick to point out that the aim of the above is certainly not to teach you to trade, it’s important to understand that currency traders also try to forecast future price behaviour. It's clear that the customer, as someone who wants to exchange currency at the best rate possible, can benefit hugely from just a little bit of that knowledge. By looking at indicators on a chart you're not only in a position to exchange funds at the right time in order to get the best exchange rate, but you’re also able to check that the exchange rate you're being offered is a good one - the best one. Next time you want to exchange currency, it's certainly worth looking around to see if there's a better deal out there - there almost certainly is, and there’s a wealth of complimentary extras on offer. For more information, the friendly team at Accendo FX is always on hand to answer questions or discuss any aspect of this guide in more detail. You can also sign up for their informative weekly Currency Insight newsletter.

5