How does the mid-market rate affect your international transactions?
- •Understanding the mid-market exchange rate
- •What is the mid-market rate?
- •Keep up-to-date with the MMR to avoid overpaying
- •The mid-market rate in international transactions
- •What are spreads in the context of foreign exchange?
- •How to predict the dynamics of the mid-market rate
- •Strategies for leveraging the mid-market rate
- •The future of currency exchange
- •Your business can access the mid-market rate with Airwallex
Understanding the mid-market exchange rate
If you’re involved in international business, it’s helpful to have a good understanding of the mid-market exchange rate (MMER). Also known as the interbank rate, this constantly fluctuating figure serves as an important benchmark for currency exchange transactions.
Once you have a grasp on how the mid-market exchange rate functions, you can price your products and services efficiently. You can also ensure you partner with financial services companies that offer fair foreign exchange (FX) rates.
What is the mid-market rate?
The mid-market exchange rate is the midpoint between the buying and selling prices of two currencies in the foreign exchange market. It represents the fair value of one currency in relation to another at a certain point in time, free from any profit margin, fees or markups. It is determined by the supply and demand conditions in the currency markets.
Generally, when individuals and businesses exchange currencies, they are not offered the mid-market rate. Banks and other financial service providers will add a margin to cover costs and to generate a profit. Instead, the MMR serves as a standard for evaluating the fairness of regular FX rates for buyers and sellers. It can be considered as an accurate indicator of a currency’s value at a specific moment.
Keep up-to-date with the MMR to avoid overpaying
Banks and financial institutions aren’t always transparent about the markups and hidden costs that can come with international transactions and currency conversions. For this reason, it’s best to stay up-to-date with the interbank rate as it fluctuates, and shop around for a good deal on your foreign currency exchange, especially if you are dealing with large transaction volumes.
If you are a business that is paying a supplier in a foreign currency, you may come across banks and money transfer services that offer a 0% fee, or no commission. This may sound like a good deal, but these companies might be hiding extra costs in an over-inflated exchange rate.
Imagine you want to send 1000 GBP to a supplier in Portugal, in EUR. The interbank rate for this moment in time may dictate that 1 GBP = 1.16 EUR. This means that if you sent £1000, your supplier should receive €1160. However, when you use a legacy bank, you may find that the rate they charge is 1 GBP = 1.09 EUR. This means that when you send £1000 they would only receive €1090. The cost of the exchange is €70, plus any additional fees charged by the sending or receiving banks.
The mid-market rate in international transactions
The mid-market rate makes cross-border transactions smoother for businesses and reduces the uncertainties associated with currency conversions. It’s transparent – which isn’t always the case for FX rates offered by banks – and can’t be disputed.
There are many elements of the finance industry that rely on the concept of the mid-market rate:
Pricing of goods and services
Contract negotiations with international partners
Risk management in international trade: financial instruments and hedging strategies based on the interbank rate can soften the blow of adverse changes in forex rate.
Valuation of assets and liabilities in foreign currencies
Foreign direct investment
International portfolio management
Remittances: savvy consumers who are aware of the mid-market rate can shop around for a good deal on remittance providers when sending money internationally.
What are spreads in the context of foreign exchange?
When talking about foreign exchange (forex) and financial markets, the spread refers to the difference between the buying (bid) and selling (ask) prices of a currency pair. The bid price is the highest price a buyer is willing to pay for a currency, and the ask price is the lowest price a seller will accept for a currency.
In other words, the spread refers to the cost of making a trade. This cost is mostly made up of the expenses incurred by the broker, as well as a profit margin. In less liquid markets, where there are fewer buyers and sellers, spreads tend to be wider. Major currency pairs involving widely traded currencies like the US dollar tend to have relatively low spreads.
Day traders, who are hoping to capitalise on price fluctuations, are particularly sensitive to spreads. However, the minimisation of transaction costs is something all investors should consider.
How to predict the dynamics of the mid-market rate
The mid-market rate is primarily determined by the basic principle of supply and demand. It’s possible to monitor the conditions that impact the supply and demand of currency pairs, such as the economic conditions of the countries or regions involved and geopolitical events in the area.
Indicators of a country’s economic health include interest rates, inflation, market dynamics and GDP growth. By monitoring these indicators, companies can anticipate potential exchange-rate fluctuations. This can help manage risk and inform financial strategy.
Political stability can also have an impact on currency values. The less stability, the more uncertainty in the markets, which makes investment in the currency less attractive.
Strategies for leveraging the mid-market rate
Use reputable online currency converters to provide real-time mid-market rates before making any currency conversion
Time currency conversions strategically, based on market conditions, to capitalise on the most favourable forex rates
Consider hedging against adverse exchange rate movements. Risk management strategies can create more certainty in financial planning
Use multi-currency accounts, which allow you to hold and manage funds in multiple currencies. These reduce the need for frequent and costly conversions, and also provide a hedge against currency-specific uncertainties
Explore financial platforms such as Airwallex, which offers the mid-market rate on foreign currency exchanges
Reduce costs by batching smaller transactions into larger ones. A thorough understanding of the fees related to international transactions and currency conversion will help you assess whether this could help your business save money.
The future of currency exchange
Automation and artificial intelligence (AI) are influencing all kinds of industries and sectors, and foreign exchange is one of them. Machine learning (ML) models can analyse vast amounts of data to predict currency movements. Future currency exchange platforms will further leverage AI to integrate real-world data, like economic indicators and geopolitical events, into their algorithms for more accurate rate predictions.
Your business can access the mid-market rate with Airwallex
With Airwallex, there are no hidden costs or inflated FX rates when it comes to currency exchange. With an Airwallex Global Account, your company can exchange currencies at the mid-market rate. You can also collect, hold, and pay out funds in multiple currencies, reduce the risks and costs of doing business across borders.
Find out more by chatting to our team, or sign up today.