Foreign currency, macroeconomics and the jargon that surround them are confusing.
We get that, and we know that you (the humble traveller trying to get more bang for your foreign currency buck) don't have time to grapple with terminology. We also know how frustrating it can be not to understand something that could potentially have a significant impact on your holiday.
We don't want to confuse you; instead, we want you to be educated enough to trust your decision of when and where to purchase your foreign currency. With this in mind, we've created a simplified glossary of the terms you should understand when thinking about your foreign currency purchase. Even if you're not travelling, this nifty little guide will give you some boujee words to throw around with confidence the next time you're talking to Karen from finance while the kettle boils in the office kitchen. Strap yourself (and Karen) in; we're about to learn.
Foreign currency lingo explained
Currency
The money used in a particular country. In Australia, we use the Australian dollar. Foreign currency is, therefore, the currency of a country outside yours.
Karen chat example: Hey Karen, I'm headed to Barcelona over Christmas. Did you know their currency is the euro? I'll add you on FB so you can keep up with my beach pics.
Exchange rates
The value of one currency relative to another. These change with every currency, and are impacted by a multitude of different factors. Each currency has an exchange rate for every other currency. For example, at the time of writing, one Australian dollar ($1) can buy 0.6581 USD and 70.834 JPY. So, if you were to exchange 2,000 Australian dollars you would get USD 1316.20 and 141,668 JPY.
It's important to remember that exchange rates and currencies are relative, so 141,668 JPY isn't the same value as 141,668 AUD. Inflation and different currency types (dollar vs. yen vs. peso) impact the cost of a currency. If they all equalled the same amount, there would be no need for exchange rates.
Karen chat example: Wow Karen, did you see the Aussie to USD exchange rate today? It's almost as hot as my green tea. Time to do some online shopping in our lunch break, amirite? Just kidding, I don't shop on work time, Karen. *awkward laugh*
Foreign exchange
Often shortened to FX, this is essentially exchanging your home currency for that of another currency. You need to do this when travelling overseas or buying overseas goods.
Text Karen chat: Hi K, hv u seen 2days fx rates? LOL. TTYL.
Wholesale exchange rate vs. retail exchange rate
When you Google an exchange rate, you will often be shown the market rate or wholesale rate. This is the real-time exchange rate and is mostly used by investors buying large amounts of the currency.
This exchange rate is different from the one you will find in fx retailers like Travel Money Oz when buying foreign currency. The retail exchange rate takes into account the costs associated with buying and selling foreign exchange.
Karen chat example: Lol, Karen, you will never believe what happened. Jan from marketing went to buy some foreign currency and was angry that she didn't get the rate shown on Google! Little did she know that was the wholesale rate and not the retail one. Classic rookie error, right, Karen?
Currency pair
This is essentially comparing the value of two currencies. Let's take AUD/USD as an example. This currency pair is comparing the value of the Australian dollar to the United States dollar. The first currency listed is known as the base currency, and the second currency is the quote currency. The currency pair talks about how much of the quote currency (USD) is required to purchase the base currency (AUD).
Here, if the AUD/USD pair is 0.68, it means you need 0.68 US cents to buy 1 Aussie dollar.
Karen chat: Quick, Karen, what is your favourite currency pairing? Mine is AUD/INR cause it sounds like the start of ordinary and that alone is the opposite of ordinary. Hardly any currency names have a vowel, Karen. Let alone two that work so perfectly together like this. Also, butter chicken is my favourite food, and I can get an extraordinary amount of butter chicken in India with some INR.
Buying vs. Selling
From an Aussie perspective, buying foreign currency means you are purchasing another currency in return for Aussie dollars. Selling is the opposite; you are giving your foreign currency and getting AUD back. Let's use USD, for example:
Buy: you give AUD and receive USD in return
Sell: you give USD and receive AUD in return
Buy and sell rates are generally different, so be sure to confirm which rate it is when you exchange.
Karen chat: Oh no, Karen, Jan from marketing is at it again. She just got back from her yoga retreat in Bali and tried to sell back her Indonesian rupiah at the BUY rate! Gosh, she's a crack up.
Spread
This refers to the difference between the buy and sell rates offered by a foreign exchange provider.
Karen chat: Is that peanut butter on your sandwich? That's a solid spread, just like the one I saw for the euro buy and sell rates at Travel Money Oz today.
Cross rate
The rate used when exchanging currencies that do not include the local currency. E.g. coming to Travel Money Oz and exchanging USD for Euro.
Karen chat: Do you prefer cutting your sandwiches in a cross or straight? Straight? Yeah me too. I find it's easier to understand, kinda like how confusing cross exchange rates can be. Haha, just kidding I know all about them. Want me to explain?
Commission
An unpleasant fee that certain foreign exchange providers charge as an add on during your exchange. Travel Money Oz doesn't charge any commission or fees for that matter.
Karen chat: I brought homemade paella for lunch today Karen, in preparation for my time in Barcelona. I prefer homemade and not frozen, purely because I know exactly what I am eating. Kinda like when I bought my euros from Travel Money Oz and knew exactly what I was charged because they are fee and commission free.
Appreciation
When the value of one currency increases relative to another. For example, if the AUD went from 0.68 to 0.69USD, it has appreciated.
Karen chat: Great news Karen, the Aussie dollar has appreciated against the USD! I'm gonna be doing some online shopping now; the internet is a weird and wonderful place! Of course, this will all be done in my personal time haha, no shopping at work!
Depreciation
When the value of a currency decreases relative to another. So, if the AUD goes from 0.69 to 0.68 USD, it has depreciated.
Karen chat: Karen, I am depressed. I found a ripper set of Aztec wall hangings for my reading nook at home, but the damn Aussie dollar went and depreciated against the Mexican peso overnight, and the price went up. Oh well, at least you know what to buy if you get me for secret Santa this year!
Volatility
This refers to the level of risk related to an asset, which in this instance would be foreign currency. Higher volatility means the value and movements of currency are spread out over a broader range, meaning its price can change significantly over a short time. Lower volatility is the opposite.
Currencies with a lower level of volatility are considered safer investments, and will often increase in value when there is turmoil or uncertainty in global economies. Both the USD and JPY are considered 'safe investments', so you will generally see their value increase alongside market uncertainty. The Aussie dollar, however, is thought of as a riskier investment, so while it's value will decrease in times of uncertainty, you will often see it increase when markets are feeling confident.
Karen chat: Did you see the news overnight, Karen? China and the US are fighting again, and they probably won't sign a trade deal. Also, a dog was riding a skateboard. Anyway, skater dog aside, I'm bummed about the whole US/China thing because it’s increased market volatility and put downward pressure on the AUD against the euro right before I was going to purchase more for my Barcelona trip. Lucky Travel Money Oz has Rate Move Guarantee, so if I purchase and the rate improves within 14 days they will refund me the difference*.
Risk-off vs Risk-on
This theory is essentially what we were talking about above. Levels of investment will change based on the level of risk tolerance in the market. If there is low risk, markets are 'risk-on' and more willing to engage in riskier investments like the Aussie dollar. The opposite is the case for risk-off markets.
Karen chat: Karen, great news!!! China and the US are back on track with their trade deal; also the skating dog now knows how to surf! As the pooch is saying cowabunga, FX markets have a risk-on mood, and the value of the AUD has gone up!
Bearish vs. Bullish markets
These terms refer to the general sentiment of the people trading in currency markets. A bull market is when buyers are optimistic about the rise in prices. Bear markets are pessimistic about the dropping value of prices.
Bulls attack by pushing their horns up and bears attack by swiping their paws down. So remember:
Bull = prices going up
Bear = prices going down
Karen chat: What's your favourite animal, Karen? Mine are bears, unless it's a foreign currency market right before my holiday, in which case I love bulls.
Hopefully, by this point, Karen hasn't filed a harassment claim and is instead appreciative of your newfound foreign currency knowledge. If Karen is sick of listening, you're keen to learn more, or you're ready to purchase some foreign currency, make sure you head into your local Travel Money Oz. Our experts will ensure you're leaving with a good understanding of your travel money, as well as a personalised foreign currency solution tailored to your holiday.
This blog is provided for information only and does not take into consideration your objectives, financial situation or needs. You should consider whether the information and suggestions contained in any blog entry are appropriate for you, having regard to your own objectives, financial situation and needs. While we take reasonable care in providing the blog, we give no warranties or representations that it is complete or accurate, or is appropriate for you. We are not liable for any loss caused, whether due to negligence or otherwise, arising from use of, or reliance on, the information and/or suggestions contained in this blog. Terms and conditions apply to Best Price Guarantee and Rate Move Guarantee. See in store or travelmoneyoz.com for more details.
