Best strategies to cash in on the slumping pound

The pound is falling, so what’s the best strategy for sending money to the UK? Send a lump sum, hold for now or send monthly instalments? LH, Dubai

Expert 1:

Gaurav Kashyap, head of futures at Axitrader

It has been a year for tremendous event risk for the British pound and this downward mom­entum is set to continue. Volatility will be high through the end of 2016 and the early parts of 2017 and although we will see some bounces in the pound, it will be as a result of relief rallies as the overall sentiment for the currency and the British eco­nomy as a whole remains anaemic.

The data coming out of the UK is starting to show the hangover from the Brexit vote – in the most recent GDP reading, data showed that the UK economy grew only 0.5 per cent in the third quarter, below the previous 0.7 per cent reading in Q2.

The economic impacts of the vote will strain the UK economy and we can expect further weakness in the pound. The currency is already trading at multi-decade lows, at the time of writing the exchange rate sat at 4.48 against the dirham. And we expect to see more downsides in the months ahead. Along with the overall bearish view of the UK economy, the prospects of the US dollar also will put more downside pressure on the GBP/AED. As the UAE is pegged to the performance of the dollar, an appreciating dollar improves our buying power here in the UAE as well – and with the US central bank set to start hiking US interest rates at the turn of the year, this will support the dollar and ultimately the buying power of our dirhams as well. Having said this we must look for another move towards 4.00-4.300 when discussing the GBP-AED exchange rate.

For UK expats in the UAE, this could mean the time to transfer dirhams back to the motherland might not have come yet. Because of the expected downside move, it would prove prudent to wait until the first quarter of 2017. While many may have already transferred at higher rates it’s not all bad news. There are several tools available to hedge, or protect against the market moving lower than your conversion rate.

Let’s assume you transferred £50,000 following the Brexit vote. That would have cost Dh245,000 at the prevailing rate of Dh4.9 to the pound. Since then the pound has fallen towards the current Dh4.50. Although the transfer is done, your cash asset has essentially depreciated 8 per cent (from Dh4.9 to Dh4.5) and you have lost Dh20,000. However, through using derivatives you could have essentially sold a contract for the same value, so even if the pound falls even further whatever depreciation you experience on your physical transaction is covered by the profit generated through the derivative hedge. This tool isn’t to profit from the falling pound – you are just protecting yourself from further falling pound prices. Such derivative tools are readily available here in the UAE. For example, the Dubai Gold & Commodities Exchange, of which AxiTrader is a member, offers a highly regulated British pound solution. But ensure you ask your broker about any potential risks.

Expert 2:

Sam Instone, chief executive of AES International

Although the current exchange rate in sterling is extremely favourable when compared to historic rates across a number of currencies, remember every piece of economic data and news affects currency markets to create a “fair” current price. Because it is completely impossible to predict the future, any advice on timing is tantamount to fortune telling.

It would be prudent to consider any liabilities both here and in the UK before deciding the frequency of sending back money. A lump sum could be a good way to lock in the current rate, which is highly favourable by his­toric standards. However, you may regret sending it all in one transaction if the pound continues to fall. Typically, sending money back home in tranches mitigates this risk, although you need to be mindful of additional charges for a greater number of transactions.

Next question:

I want to invest in stocks and ETFs but keep hearing about this looming stock market crash. I’ve been holding off for a couple of months, so when is it going to happen? TB, Dubai

Every three weeks The National features a reader’s personal finance problem. If you have an issue or want to suggest a solution for another reader’s concern, write to pf@thenational.ae

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