Hello and welcome to issue #059 of the abroaden weekly insights newsletter, this week focusing on interest rates, the US dollar, shifting consumer habits, and Wise’s stock offer.
The dollar on the move
If you’re watching the currency markets (and you probably shouldn’t pay too much attention to them as it’s terrible for your health), you likely saw the dollar on the move.
Over a week, the US dollar gained (or lost depending on what side you look at) nearly 3% versus the EUR.
On Wednesday, the US central bank — the Federal Reserve — made a surprise announcement.
The central bank stated that it might raise interest rates sooner than expected based on the faster-than-expected economic recovery.
This statement has implications across the entire economy.
Central banks use interest rates to control the temperature of the economy.
When the economy gets too hot, it raises interest rates.
(In theory), people and companies stop spending money and start saving it as it gets a higher return.
When the economy needs heating, the central bank will drop interest rates to get cash out.
Interest rates touch almost every aspect of economic life.
They determine how much it costs for us to borrow money, set what we make in a savings account, and make stocks less attractive
So when the Fed said that they could raise rates a year early, it sent global markets into overdrive.
Right now, interest rates globally are at historical lows.
So when the Fed announced, investors around the world jumped at the opportunity to get higher returns in the US bond (loan) market.
In turn, the demand for dollars spiked, which strengthened the USD.
Remember: even if markets set exchange rates, the words and acts of central banks have the most significant ability to move them.
In the end, a country or currency bloc’s interest rates have outsized influence over exchange rates.
My apologies if this information is a bit wonky.
However, there’s so much misconception about how FX rates work, leading people to make bad (and financially harmful) decisions.
If you’re a remote worker or even live abroad but have money in a different currency, exchange rates play a huge part in your life.
Knowing how they work will make your life less stressful.
We’re building the first online investment adviser for people living abroad like yourself. Don’t miss out on taking control of your financial future.
Shifting from goods to services
Last week, we had some more news out of the United States.
According to the US Commerce Department, Americans started changing their spending habits.
Consumers are now spending less on goods and more on services as Covid restrictions end.
This news tells us a couple of things.
First, many economists saw this shift coming even from a year ago.
People generally like to have fun with friends and family through experiences.
Obviously, that wasn’t possible last year.
Now, with people able to go back out, they ostensibly are cutting back on purchasing goods.
Many inflation fears came from a spike in goods as a year of at-home consumption drove up prices.
Now, with this shift to services, the pressure on goods is easing.
In turn, that will help ease some of the pressure from inflation. (Even if there are still some concerns and a lot of uncertainty).
Second, it maps an economic recovery pathway for other countries.
With America going first, it will give central banks and policymakers worldwide a better idea of how their economies might change.
In turn, this will add economic stability in what’s an already volatile world.
What you should know about (Transfer) Wise’s share offering.
If you’re a user of the currency exchange platform (Transfer)Wise, there’s a decent chance you received an email from them with a special promotion.
OwnWise is an offer for specific customers to get early access to their shares.
According to the website, the company wants to “go public” (i.e., trade on a stock exchange) soon.
The plan is to list on the London Stock Exchange, allowing global investors to quickly buy and sell the company’s shares.
In doing so, it could mean both a significant capital injection and a nice payday for investors holding shares beforehand.
The promo works like this:
- Eligible customers (based on where you live) can buy shares before the public listing.
- If you do and hold them for at least 12 months, you’ll get some bonus shares. You could think of this as an option that lets you get shares at a discount.
- Once the shares are public on the London Stock Exchange, you can sell them (ideally at a profit). That said, Wise wants you to hold them for more than a year and be a long-term investor (hence the bonus).
You’re probably asking yourself if this offer is a good investment for you.
Unfortunately, we can’t answer that in a newsletter because we don’t know you.
That said, if you are interested, there are some general tips you should know about.
Stock investing is inherently risky: Investing in an individual company — even one as popular as Wise carries many risks.
There is no diversification (outside of your other investments).
We don’t know the listing currency yet, but it will likely either be in British Pounds or US Dollars.
That means there’s currency risk.
Never put in more than you’re comfortable losing. With diversification inexistent, you don’t want to risk betting the farm on one stock.
Otherwise, you might lose sleep, money, and peace of mind.
Unless you’re a UK resident, these will be foreign shares. That means there’s additional reporting involved for you in your tax country.
Read the documents. Wise will release documents about the terms and conditions of the shares.
It will be a cryptic text, but one that will contain details worth paying attention to (we’ll keep our eye out for it should you have any questions).