The sharp fall in the Australian dollar has gained plenty of attention lately. At the time of writing the Aussie had lost around 15 per cent against major currencies such as the Japanese Yen, Euro, Great British Pound and of course the US dollar in the space of just a few months. This has caught many a traveller off guard and prompted people that have spent weeks or months planning a big overseas trip to ask the question – “what should I do now?”
Australian currency picture from Shutterstock
For businesses protecting (hedging) against a further depreciation in the Aussie dollar may entail entering some structured products like Forward Exchange Contracts (FECs) or Options or a combination of both. The alternatives for individuals travelling overseas however appear limited. Or are they?
Lock it in
One of the benefits of the massive growth in the popularity of travel cards in recent years is the ability to hedge or protect against further weakening of the currency. These products allow you to convert at a known exchange rate in advance of the travel date – in essence fixing the cost of your spending money.
You may have paid your airfare and accommodation fixing these costs however few people think to fix the spending money component of the trip until the last minute.
The process of doing so is actually quite simple in that once you have one of these cards you can convert your Aussie dollars into the foreign currency at any time prior to the actual trip.
So if for example you had converted your Aussie dollars to Euro a month or two ago ahead of a European summer vacation then the total cost of the trip, including airfare, accommodation AND spending money is known up front – no nasty surprises.
This brings me to my next point. These cards can be used as a savings mechanism for your holiday.
By loading and converting funds throughout the year, not only are you averaging on the exchange rate — which means you are not tied into one single exchange rate on one certain day — but you don’t come back to a nasty credit card bill that lasts a whole lot longer than the holiday itself.
We can't predict with certainty where any currency is headed. But with such a strong market consensus bearish on the Aussie, it may be wise buy your foreign currency now.
On the upside, with Australian prices for imported items so high, you should still enjoy some good holiday shopping even if AUD sinks a bit further. Keep a sharp eye on exchange rates when you go (OzForex has free Android and iOS apps) so you can work out what's still a bargain.
Jim Vrondas is chief currency and payment strategist, Asia-Pacific at OzForex, Australia's leading international money transfer service. OzForex's cutting edge technology powers foreign exchange services for 100,000 private and institutional clients across six continents, and the company is a key provider of forex news.