# How to decide whether to pay an USD amount from my AUD account or from my EUR account?

Soon I have a payment of, say, 100 USD to make and I have an AUD account which holds enough currency and an EUR account which holds enough currency.

I wonder which account to choose?

Just looking at the individual exchange rates EUR -> USD and AUD -> USD (incl. fees) isn't enough, even when I check each exchange graph over time. I some how need to take into account how EUR and AUD relate to each other as well.

Additionally I realise I somehow need to do future predictions: After all, let's say, AUD looses a lot of value in the future while EUR keeps its value, (and both can somehow be guessed now) than it would make sense to use the AUD balance now (before it looses its value), right?

The whole decision process is pretty clouded to me. Is there a practical standard way to assess this?

You're turning this into a question of currency arbitrage, for which there is no simple answer. I'm not sure there's even a complex answer that anyone would agree upon, since once you start looking into the future you're trying to predict global political/economic patterns.

Personally, I'd just look at which choice is currently furthest above it's historical average exchange rate (or least below) and spend that. Assuming I bothered at all.

Given your current situation, you do not need to worry about the following:

Additionally I realise I somehow need to do future predictions: After all, let's say, AUD looses a lot of value in the future while EUR keeps its value, (and both can somehow be guessed now) than it would make sense to use the AUD balance now (before it looses its value), right?

If you know AUD will depreciate relative to EUR, you should not hold AUD (irrespective of the need to pay some USD amount). Since you have a EUR account and a AUD account, you are willing to hold both currencies anyways.

In terms of the 3 currencies involved, there is nothing you can do to reliably predict where the exchange rates will be in the (near) future. Kenneth Rogoff and Richard Meese received an incredulous reaction to their now-famous paper showing that random-walk (RW) forecasts (in essence, the best forecast for tomorrow is todays value) outperform economic models of exchange rates. Reactions were along the line of “You just cannot possibly have done it right” or "the results are obviously garbage". Turned out they were correct. Rogoff makes an interesting point in some later paper. If money supplies are hard to predict, then one should not blame the models if exchange rates are hard to predict. It is unforeseen news that matters. However, as Rogoff further stated, their finding was even more extreme. They tested predicting the exchange rate in one year, given the information about what money supplies, interest rates, and outputs are going to be in one year. However, even in this case, no economic model beat(s) the RW. This has been demonstrated and verified several times afterwards.

Only if inflation is substantial, and interest rates will be too low (hence money supply to large) to decrease inflation, can yuo make a prediction. If so, the currency will depreciate for sure. There is ample evidence for this (Venezuela, Turkey, Ecuador....).

It also is not important to look at how the curencies relate to each other. Given all 3 currencies are heavily traded, it will make no difference for you what currency you use in a spot trade. If you use EUR to convert to AUD to pay USD, or AUD to convert to EUR to pay USD should be practically identical (unless obviously you pay different fees for your different accounts). In other words, you can get the AUDUSD exchange rate from the EURUSD and EURAUD exchange rates and all other combinations (see triangular arbitrage).

The only consideration that could make sense is to look at the forward market. The country with the highest interest rate is "depreciating" because forwards follow covered interest rate parity.

For example if you have access to Bloomberg, you can look at `FRD` (screenshots are taken from another answer).

SP stands for Spot, Pts (Points, the most common way of quoting FX forwards)) represent what is added to Spot, Fwds are the forwards computed from quoted Spot and Pts. The darker values at the bottom indicate that these are implied (computed) from interest rates via no arbitrage. This is done when there aren't enough liquid market quotes. You can see that a substantial depreciation of RON relative to EUR is quoted / implied at the time of writing.

If you can trade forwards, you can look at which rate (AUDUSD or EURUSD) is most favourable for you. Obviously, locking in a rate today could mean a substantual "loss" compared to simply waiting and paying at spot once you need to transfer the money (e.g. if EUR appreciated a lot and you would need a lot less EUR had you not entered into a FWD). On the flip side, you know the guaranteed rate already up front.

• Wow, thanks for this! Very detailed. I have to digest this... Commented Apr 6, 2023 at 1:55

The only way I can think of to calculate it would be to consider a double transfer. Like, If I transferred AUD to EUR and then EUR to USD, how many AUD would I need to have \$100 at the end? Versus if I transferred AUD directory to USD. Or likewise, if I transferred EUR to AUD and then AUD to USD, versus if I transferred EUR directly to USD.

Once you start talking about estimating future exchange rates, there's just no way you'll get a definitive answer because no one knows what future exchange rates will be. And in any case I think that would be irrelevant. If, say, you expect the Euro to go up relative to the Australian dollar in six months, then some time between now and six months from now you should convert AUD to EUR. But what does that have to do with which you use to pay for a purchase today? You could always make up for any changing exchange rates that happen next month by exchanging currency next month.

No, there is no way to assess this, because nobody knows future exchange rates. So either currency is just as likely to come up ahead a month from now.

As AKdemy alluded to, markets are generally efficient and price changes are a random walk. You might want to do research into the efficient market hypothesis, as it will free your mind of the stress of trying to predict winners or time the market: The current price in a liquid market is a fair price based on today's information.

The only thing you can do to reduce your risk (assuming it doesn't increase your forex fees too much) is diversify: Sell a little of both currencies.