Deep Impact

Following from my last post on decision, I have a pretty major one to make; the decision of how the GBP will weather the new economy. I say new economy in an optimistic, forward thinking way... just because an economy is struggling, it does not mean that is necessarily "bad"... it just means that it has to be tackled in a different way.

After reading different articles on the destination of the pound, I am estimating that we will reach parity with the dollar by the end of the year. As such I will be transferring as much liquidity to US dollars as soon as possible, including ISA holdings irrespective of the ISA allowances for this and next financial.

I will use E*TRADE to invest 50% of my liquidity into a suitable fund, which I will decide on by the end of the month. I will keep the reminder in my low interest bearing PayPal account (0.59% yield, 0.59% AER with below formula). This will come at a high price, especially when compared with ISA tax free earning potential of 3.25% AER. If saving $10,000 for the full year, I would receive:

PayPal Money Market: $59
Tax Free ISA: $325

It would in effect be costing a total of $266 to hold my funds elsewhere, or the equivalent of 2.66% of my savings. Of course, this is negating the movement of the pound, would according to my estimates will be multiples of that figure.

Incidentally, the transferrance of funds across borders also comes at a high price. To give you an idea, right now the spread is as follows:

GBP to USD
Trade Rate: 0.703584 GBP Inverse: 1.42129 USD
Mid Market Rate: 0.686632 GBP Inverse: 1.45638 USD

USD to GBP
Trade Rate: 1.49330 USD Inverse: 0.669658 USD
Mid Market Rate: 1.45639 USD Inverse: 0.686629 GBP

To put that into a tangible sum, transferring 10,000 GBP to USD:

Trade Rate: $14212.90
Mid Market Rate: $14563.80

Bring the difference to $350.90 or 240.94 GBP. To put that into super-human-readable format, it means that a one way cross border transaction UK -> US would at this time cost 2.41%. So this decision cannot be taken lightly, at a sum cost of 5.07% (even before fund interest is potentially added to an investment ISA).

The question therefore is whether the pound will continue its trend of sliding against the dollar, or whether the dollar will weaken as the full force of the economic situation becomes apparent in the States. As stated earlier, I am certain it will be the former, and am accordingly willing to risk the 5.07% for the greater potential.

I will close my USD savings account here in the UK, along with my superflious USD current and GBP savings accounts. I will keep my NatWest current, savings (for short term hold), and ISA (for medium term hold).

AER to Gross: 12*((1+AER)^(1/12)-1), so for 5% interest rate you would: 12*((1+0.05)^(1/12)-1) = 4.89% gross
Gross to AER: ((1+gross_interest/12)^12)-1, so for 5% gross interest rate you would: ((1+0.05/12)^12)-1 = 5.12% AER