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I'm planning a one-year sabbatical in Europe, starting in January 2012. I have a year's worth of expenses saved in Canadian dollars. I'll need euros for day-to-day transactions while abroad.

What strategies for converting CAD -> Euros will help me avoid exchange fees and wild fluctuations in the exchange rate, while allowing me access to my money?

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If we knew for sure that euros are only going to be more expensive in the future, then the answer would be easy: Buy them all at one time, so that we are getting them at the best price. Of course, we can't assume that to be the case, they could get cheaper, so the answer gets more complicated.

Focusing strictly on monetary considerations, there are two factors to examine:

  • List item The overhead cost of currency conversion. How much do we anticipate each conversion costing?
  • List item The variation in exchange rate. Can we assume the rate do remain steady or is it more reasonable to assume fluctuations? If there are fluctations, how much might it change over the course of a year?

Using answers to this Travel Stack Exchange question as a reference, you see that the cost of currency conversion can be as low as 1%-2% if you make the transaction with a debit card, but can be as high as 15%. So, buying 1000 euros a month would cost between 20 and 150 euros.

Examining a two year chart of the Euro-Canadian Dollar exchange rate gives us an idea of how much the currency fluctuates. Over the past two years, a euro has cost has much as $1.54 CAD and as little as $1.26 CAD, a 22% spread. Looking at it on a month-to month basis, we see that monthly changes have been as high as .05 to .07 (4-5%). As such, buying 1000 euros a month could cost 50 CAD more (or less) on a monthly basis due to variance in the exchange rate.

If we anticipate our overhead cost of currency conversion to be more than 5%, it doesn't make sense to do multiple transactions; the costs are likely to outweigh the benefits. If we can keep them under that amount, then multiple transactions are advantageous when the euro is cheaper.

The problem is somewhat analagous to that of someone who wants to make an annual investment in a mutual fund and is unsure of whether to make the purchase all at once, or to divide it over multiple purchases. One can't know for sure which way the mutual fund price is going to move over the time period Dollar cost averaging, spreading the purchase over regular intervals, is the generally accepted solution to this problem.

As such, so long as we can keep the overhead cost of currency transactions low (<5%), doing transactions on a regular basis positions ourselves to take advantage of possible drops in the price of euros and reduces the risk of buying euros when they are most expensive. If we can't keep the cost low, then currency fees would be greater than potential price drops and we would be better off doing a single transaction.

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    Not "more likely to be advantageous" but "more likely to be average, and less likely to be lucky or unlucky". – ChrisW Dec 15 '11 at 6:43
  • Indeed, doing transactions on a regular basis is only "more likely to be advantageous" if it is also "more likely" that the currency will get cheaper. That's not an assumption I intended to make. Re-wrote the conclusion to recharacterize the transactions on a regular basis scenario. – clfenwi Dec 15 '11 at 13:15
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  • Change it all at once
  • Unless you're expecting the Euro to devalue against the CAD, in which case save your CAD till later
  • Or commit to buying fixed Euros (or spending fixed CAD) per month, in order to buy Euros at an averaged price
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    Change it all at once is rash advice given the very real questions about the Euro's future. One needn't expect Euro devaluation in order to be reasonably concerned about the possibilty. – mgkrebbs Nov 30 '11 at 19:14
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    @mgkrebbs - If his cost is some fixed number of Euros, then buying Euros is a low-risk proposition, isn't it? And buying all at once makes it simpler, locks-in the rate (eliminates risk), and reduces the cost per transaction. – ChrisW Dec 1 '11 at 5:01
  • I would argue that he should change it all at once as well no matter his expectations for the euro. Despite what might happen to the Euro it is highly unlikely that the daily costs will change that dramatically over one year in Euro denominated transactions. The alternative (running out of money) should the euro appreciate is a much riskier proposition. – Pablitorun Dec 1 '11 at 18:19
  • For international transactions between banks, there's often a fixed transaction fee, which makes it more expensive to send small amounts for multiple times as opposed to sending a large amount once. You should check the development of the exchange rate here. The rate did not fluctuate THAT much in the recent weeks and right now it's cheap to buy Euros. – Lagerbaer Dec 11 '11 at 17:07
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I usually look at the high and low exchange rates for the last five years. If the current rate is fairly close to the high for a trade over the past five years, then I do the trade. If the current exchange rate is close to the low, then I wait.

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