If you have ever travelled overseas or needed t o transfer money to a foreign country, then you are familiar with exchange rates. But have you ever stopped to wonder what the exchange rate is telling you? Do you know when you are getting a good exchange rate or a bad one?
When it comes to making international money transfers the exchange rate is 'king'. This is where banks and currency transfer companies make the biggest buck off their customers. Understanding how to read and interpret exchange rates is the number one way you can save money when you need to convert between currencies. Here's a quick guide to help you get the best exchange rate for your next international money transfer.
What are exchange rates?
An exchange rate is the price of one currency expressed in terms of another currency. That's why you when you look at a currency exchange rate you will notice that they are always quoted in a pair. AUD/USD or AUD/JPY, for example. This is because when you are buying one currency you are selling a different one at the same time.
Exchange rates can be floating or fixed. Each country determines the exchange rate regime that will apply to its currency.
A floating exchange rate is one where the currency rate is determined by market forces of supply and demand. Floating exchange rates fluctuate constantly as they are traded on the open foreign exchange market. Most countries have floating exchange rates, including Australia.
Some nations prefer to fix their domestic currency to a widely accepted currency like the U.S dollar. This could be to reduce volatility or to manage trade relations. Countries that have fixed exchange rates include Saudi Arabia, Hong Kong and the United Arab Emirates.
How to read exchange rates
By teaching yourself how to read currency exchange rates, you can better understand currency values and gain more control over your international money transfers.
Some sample exchange rate quotes would look like this:
AUD/USD = 0.7431 GBP/AUD = 1.7682 USD/JPY = 111.87
The first step in reading exchange rates is understanding the difference between "base" and "term" currencies. The base currency in a standard quote is the currency to the left of the "/". The term currency is always to the right of the "/".
For AUD/USD, the AUD is the base currency while the USD is the term.
Now that you understand the terminology, it's important to know that with every currency quote the base currency is always equal to 1 unit and the term currency is what one base unit is equivalent to in the other currency.
Confused?! Don't be, let's go through the examples to make it clearer.
1. AUD/USD = 0.7431
In this example, 1 AUD is equal to 74.31 US cents. You could also think about it as the amount of USD you would need to sell (74.31 cents) to buy 1 AUD.
2. GBP/AUD = 1.7682
Here, if you wanted to buy 1 Pound it would cost you 1.7682 Australian dollars.
3. USD/JPY = 111.87
If you wanted to sell 1 US dollar, you would receive 111.87 Japanese yen
How to get the best exchange rate
So now that we know how to read exchanges let's talk about how you can get the best exchange rate for your next international money transfer.
Research the market exchange rate
Before you go with any bank or foreign exchange provider you need to know what the real market exchange rate is. The real market exchange rate is where the banks buy and sell currencies from one another. It is the purest expression of the price of a currency pair.
Finding the market exchange rate is simple. Just type in the currency pair into Google, AUDUSD for example, and you will be presented with a number of links to sites that will show you the real market exchange rate. Bloomberg and Yahoo Finance are two good places where you can find this information.
The market exchange rate will be your reference point for comparing the conversion rates offered by various money transfer companies.
Compare, Compare, Compare
The next step is to start comparing the conversion rates offered by different international money transfer companies to the real market exchange rate. This little bit of homework will go a long way to helping you save a lot of money.
The way that all foreign exchange transfer companies make money is by charging customers a margin on top of the market exchange rate. The margin will be the difference between the real market exchange rate and the conversion rate you receive when you transfer money.
Let's look at an example:
The real market exchange rate for AUD/USD is 0.7431. If you were to transfer AUD 1,000 using this rate that you would receive ~USD 743.
If you were to use your bank to transfer money overseas you would likely receive something closer to USD 703 for your AUD 1,000. That ~USD 40 difference represents a 5.5% margin on the real exchange rate. So instead of 0.7431 you would be getting a rate of 0.7031!
Banks are the worst offenders when it comes to charging excessive margins on the exchange rate. Shopping around to compare exchange rates will help you spot the good from the bad.
FlashFX can help you get the best exchange rate
FlashFX is an independent foreign exchange company that can help you get the best exchange rate for your next international money transfer.
The rates you see on our website are the rates you will get – no hidden surprises. We show you how we compare to all the major Australian banks, so you can be sure that you are getting the best deal by choosing us for your international money transfer. Never miss a great exchange rate again by signing up to our rate alert emails.
FlashFX wants you to save on transaction costs, too. That's why we don't charge any. That's right - zero.
Unlike other currency specialists, FlashFX is bringing transparency to the international money transfer process. We always show you the total cost of your transfer upfront, so you know exactly what to expect on the other end.
Plus, we let you track your money every step of the way. Just like a package.