When you sell foreign currency, it’s a sign that you believe the currency you are selling will weaken in value compared to other nations’ currency. How do you determine when it’s the best time to buy and sell foreign currency? While there are numerous factors that affect currency exchange rates, here are five key signs when it will be profitable to sell:
5 SIGNS IT’S TIME TO SELL FOREIGN CURRENCY
- Inflation Rate Falls
- Interest Rates Rise
- Currency Revaluates
- Political Change
- Economic Change
You can also decide to buy the currency of a nation because you will be able to make a profit when the currency revalues. For instance, if you were to invest in the Iraqi currency, it’s because it is inexpensive to buy with United States dollars and economic forecasts about Iraq suggest a foreign currency revaluation of the dinar in the near future. Consequently, you will be able to profit by buying low and selling high.
Investors typically use one or more of these five signals when they decide to sell foreign currency. Usually, however, it’s a good idea to sell when you have several factors working together since this suggests an overall trend.
1. Inflation Rate Falls
A country’s inflation rate impacts its currency and its foreign exchange rate. Ironically, both high and low inflation can have a negative economic impact. A high rate of inflation means that consumers have to pay more for goods and services that have not increased in demand or value while a low rate does not assure investors a favorable foreign exchange rate.
For instance, in 2015, between the months of November and December, Canada’s inflation rate dropped from 2% to 1.5%–and then even lower in subsequent months. During the previous year, one Canadian dollar was equivalent to $0.91 in United States dollars. After the inflation rate dropped, one Canadian dollar was equivalent to $0.80 in United States dollars. This may not seem much, but it represents a 12% fall in currency value. We can see a clear relationship between the fall in the inflation rate and the fall in its currency value against the United States dollar.
Incidentally, what is true of a change in currency value of one currency against another in a pair is not true for one national currency against all currencies. So, while the Canadian dollar did significantly depreciate against the United States dollar, the value of the Canadian dollar continued to favorably match the Australian dollar, the euro, and the British pound. This is an important distinction to keep in mind. When thinking of selling a foreign currency you should base your decision on the currency pair you are specifically evaluating and avoid the temptation to generalize.
While examining inflation rates is important when deciding whether to sell a currency, it should not be the only factor to consider. Interpreting the effects of inflation is too complex an issue for economic forecasting, and there are many other variables at play.
2. Interest Rates Rise
Interest rates are affected by inflationary trends. The two have a complex interrelationship that is difficult for a government to balance. Initially, low-interest rates can be seen as positive for two reasons: It spurs economic growth and increases how much consumers spend. When interest rates are low, entrepreneurs tend to borrow more to build companies that offer enticing goods and services to the marketplace. Also, consumers are more likely to buy goods and services rather than conserve their funds.
However, as the trend continues, there comes a point of saturation. This occurs when consumer spending becomes excessive and the demand for goods and services exceeds the number of businesses that can supply them. When this happens, high inflation occurs, and interest rates rise. When interest rates rise, this attracts more foreign investments. This, in turn, will increase the demand for a home nation’s currency. All this is positive enough, but inflation is also likely to increase as well, which will then depreciate the currency value.
3. Currency Revaluates
Revaluation is the opposite of devaluation: While revaluation is upward, devaluation is downward. Both are measured by a specified baseline and both affect a nation’s foreign exchange rate. A number of measures can be used as a baseline. For instance, it could be the living wage rate or the price of precious metals like gold, silver, or other bullion products.
In a fixed exchange rate system, revaluation is a decision to change the official value of a currency by its government or central bank, and in a floating exchange system, as a result of market forces affecting the value of a currency.
Revaluations may happen regularly, rather than just periodically, and they create fluctuations in the FOREX market and in foreign exchange rates. It not only affects a currency but also the asset value of a foreign company that holds the currency. This affects the book value of foreign assets.
Many possible events can spark a currency evaluation. For instance, it might be interest rate changes between countries or it might be new, emerging markets in an economy that affect competition or profits.
4. Political Change
Political changes, especially if they are drastic, can create a huge economic impact, changing its economic outlook and the value of the national currency. For instance, this can occur following the election of a new leader who has a completely new vision for the direction of the country, or a coup d’état when the military overthrows a demagogue.
By monitoring the political changes around the world, a Forex investor can gauge in what direction a country is moving and how it will affect the economy. Besides selling when there are radical political changes, they might also decide to sell if there is an increase in government spending, a restriction on an industry, or other factors that could affect the foreign exchange rate.
A recent example of a political change that will have an economic impact is Brexit. The British pound (GBP) reached an all-time low since 1985 after the UK decided by popular vote to leave the European Union. This loss of confidence in the currency was due to the fact that the country’s economic future became uncertain and difficult to forecast.
Political changes affect fiscal trends and monetary policies. When these occur, a government and a central bank may make new economic decisions that affect interest rates, inflation, and foreign exchange rates.
5. Economic Change
Forex traders also pay close attention to economic reports to understand the economic outlook of a country. Here are some key indicators that help a trader decide whether or not to sell foreign currency:
- Gross Domestic Product (GDP) is a broad look, a quantitative measure, of a country’s economic regression, stagnation, or growth. It is a baseline figure that measures the country’s monetary value. This value is calculated based on the goods and services created within its boundaries over a given period of time. However, it’s important to keep in mind that this is a lagging indicator–it measures economic trends and events that have already happened.
- Inflation measures the purchasing power of a currency. Inflation can be upward or downward. As a result of inflation, currency can appreciate or depreciate. Depending on the rate of inflation, foreign investments may increase or decrease. When inflation rises too high, the central bank may take steps to curb it. Since inflation is a dynamic movement, it can be hard to balance, and its effect on the value of a currency is not easy to estimate.
- Employment levels affect economic strength or weakness.
- Retail sales levels may rise or fall based on seasons and global economic trends.
- Manufacturing indexes can change depending on technological innovations.
Where to Sell Foreign Currency
In the US, compared to many other countries, currency exchange firms are not widespread. However, you can sell foreign currency online. Still online currency exchange companies, even if they have earned a sterling reputation for honest transactions and have the official credentials of regulatory authorities to prove that they are legitimate, are not always your only option.
The best place to sell your foreign currency is the foreign exchange market, which is also known as FOREX or FX or currency trading. This is a decentralized global market, a place where all the major currencies in the world are traded.
It’s the best place to sell back foreign currency because it is bigger than the New York Stock Exchange, is the most liquid financial market in the world, and it’s open 24 hours a day. While the New York Stock Exchange had an average daily trading volume of $38.5 billion in 2017, the average daily trading volume in the FOREX market was in excess of $5 trillion.
If you’re asking, “Where can I sell my foreign currency?” then the FOREX market is the place. However, it is not the best place if you plan to sell foreign currency notes or to sell foreign currency coins because FOREX is about electronic trading rather than cash transactions. For buying and selling foreign notes and coins or cryptocurrency, a reputable online currency trader or exchange will be your best option. These are also good places to invest if you have long-term investment plans, like buying a currency like the Vietnamese dong while the prices are low then waiting for the currency to revalue before selling it.
Two Different Types of Foreign Currency Markets
You should not confuse financial transactions to make a profit from selling foreign currency with another type of foreign exchange market related to international payments, credit card transactions to purchase foreign goods, travelers’ cheques when going overseas, airport exchange kiosks, or exchange rates at your credit union or bank.
While these, too, deal with foreign currency assets, a foreign currency purchase or a foreign currency payment, they function in a completely different way. They do share a few things in common, such as the use of money to decide the exchange rate between two currencies, but they are a different market.
The difference between these two foreign currency markets is that the foreign exchange market and foreign exchange rates focus on buying and selling currency as an investor. The other foreign exchange market is designed to serve a different sector of the economy, namely, merchants, consumers, and overseas travelers.
How to Make Money Buying and Selling Currency
You can make money buying and selling currency. However, just like buying and selling in any investment market—such as stocks, commodities, or real estate—you need three skills to do well in currency trading: education, experience, and practice.
Buying and Selling Currency
Currency trading is speculating on the currency exchange rate. This is the rate that traders exchange one currency for another. Since the FOREX market runs on the laws of supply and demand of one currency in relation to another currency, this currency exchange rate is a floating exchange rate. In contrast, when a government decides on the rate, is a fixed exchange rate.
Brokers quote currency exchange rates in pairs.
- When the forex market compares the euro and US dollar exchange rates, this is a EUR/USD pair.
- When the forex market compares the US dollar and Japanese yen exchange rates, this is a USD/JPY pair.
- When the FOREX market compares the British pound sterling and US dollar exchange rates, this a GBP/USD pair.
Most pairs involve the United States dollar because this is the world reserve currency. However, there are exceptions. One popular example is when the FOREX market compares the euro and British pound sterling exchange rates, which is a EUR/GBP pair.
Buying and selling foreign currency is not like buying and selling stocks. In the stock exchange, you either buy or sell a share, but in the currency exchange market, you’re buying and selling currency pairs. Since currency transactions strive to be as accurate as possible, the foreign exchange marketplace prices every currency to the fourth decimal. The smallest increment of a trade is a pip (percentage in point).
Currency Selling and Buying Superstars
What do billionaires like George Soros, Andy Krieger, Bill Lipschutz, Chris Larsen, Joseph Lubin, Ray Dalio, Steven A. Cohen, and Bruce Kovner have in common? They rank as some of the most successful investors in the world.
Each investor has an epic story about how they struck it big in the currency market. George Soros, for example, is known as “the man who broke the Bank of England.” In 1992, he shorted $10 billion (USD) worth of the British Pound sterling (GBP) and made a $1 billion profit.
How to Make Money Buying and Selling Foreign Currency
When it comes to buying and selling currency, you must tap into many available online resources. Here on Treasury Vault, for example, we help people who are interested in investing in the Iraqi dinar and multiple currencies from around the world. We also create educational blog articles. For instance, our post on the most valuable currencies identifies the top 10 most valuable currencies in the world and how various factors, such as a government’s monetary policy and a country’s rate of inflation, contributed to the purchasing power of the most valued currencies.
Besides a resource like ours for buying and selling currency for profit, you should also look for an online currency exchange calculator because the foreign exchange market is dynamic. Since today’s currency buying and selling rates will change tomorrow, you need quick and accurate currency conversion figures at your fingertips.
What Is Buying and Selling Digital Currency?
In addition to FOREX transactions that deal with tangible money, there is also an alternative money exchange that deals with cryptocurrency. While you will use checking and savings accounts provided by financial institutions for buying and selling currencies in FOREX trading, you will need “a digital wallet” to store your cryptocurrency.
Common Confusion About the Currency Exchange Market
By definition, the currency exchange market focuses on currency exchange buying and selling rates—but investors and travelers use it in different ways.
The different use of the currency exchange market can cause confusion. Many investors began to use the Wells Fargo currency exchange office to buy Iraqi dinars as a financial asset. They wanted this foreign currency because they planned to sell it for profit after a dinar revaluation in the future. In fact, the public demand for purchasing Iraqi dinar as a financial asset got so out of control that the bank now has the following disclaimer on their foreign exchange webpage: “Wells Fargo does not sell Iraqi dinar in any location – online, by phone, or in our branches.”
Financial institutions like banks buy foreign currency to sell to their customers as travel money. For instance, people going to Turkey would need Turkish lira. They can’t use their credit cards, debit cards, or United States dollars to buy goods, assets, or services in Turkey.
How to Buy and Sell Foreign Currency in FOREX
There are three advantages to trading in the FOREX market: It’s open 24 hours a day, it has robust liquidity, and it offers substantial leverage.
All you need is a computer with reliable internet access and a trading account with a FOREX broker. Here one type of currency is exchanged for another currency based on the exchange rate between the two different currencies. For example, when trying to decide what to buy and sell you might look for quotes on following types of currency pairs:
● EU to USD
● JPY to USD
● CAD to USD
● GBP to USD
● USD to CAD
● BAHT to USD
●USD to PHP
Basically, these are symbols for different currency pairs. For example, a CAD to USD quote will tell you that 1 Canadian Dollar (CAD) is equal to 0.76 United States Dollar (USD).
When investors are buying and selling foreign currency in the FOREX market, they treat money as a commodity and trade in currency pairs. For instance, you might look at the spot rate of the US dollar (USD) compared to the Japanese Yen (JPY) and decide to sell.
Talking about currency in the FOREX market, should not be confused with thinking of money as a means of exchange for goods and services. Instead, currency in FOREX has to be thought of as a commodity, like, say, wheat or soybeans in the futures market. FOREX trading is rather similar to electronically purchasing a share in a publicly traded company. However, there is no central exchange, but instead an interbank market, a network of banks and financial institutions.
Selling Foreign Currency
When selling currencies as an investor, look at indicators like inflation rates, interest rates, currency revaluation, political events, and economic changes. Ideally, you will consider more than one indicator to improve your chances of profiting from selling at the right time.
Think, of selling currencies as similar to selling shares, except instead of relying on the performance of a company, you are evaluating the performance of a country in relation to another country. If you are selling foreign exchange electronically, then FOREX trading is a good option. However, if you are selling foreign currency notes and coins–in other words, dealing with cash–then look for a brick-and-mortar or online currency exchange company.