Docstoc

Exchange Rates Tourist

Document Sample
Exchange Rates Tourist Powered By Docstoc
					                  Late – 2006 Dollar Exchange Rate Impact on Inbound Tourism1

                                                  December 2006

                                                Mr Chris Greenwood
                                                  Research Analyst
                                                    VisitScotland,
                                                   Ocean Point One
                                                   94 Ocean Drive
                                                 Edinburgh EH6 6JH
                                     Email: chris.greenwood@visitscotland.com
                                            Tel: 00 44 (0) 131 472 2389

                                                    Dr. Ian Yeoman
                                        Scenario Planning Research Manager,
                                                     VisitScotland,
                                                   Ocean Point One
                                                    94 Ocean Drive
                                                 Edinburgh EH6 6JH
                                        Email: ian.yeoman@visitscotland.com
                                            Tel: 00 44 (0) 131 472 2388




1
 This research bulletin has been prepared for VisitScotland and the Scottish tourism industry. No representation or
warranty is given (expressed or implied) as to its accuracy or the correctness of the information and of the opinions
contained in this report. The material should not be regarded as specific advice and no action should be taken with
reliance on it. Neither the authors nor VisitScotland accepts any liability whatsoever for any loss or damage in any way
or reliance placed upon the material. All of the events and portraits referred to within the scenarios are fictitious or
viewed in context. Publication date: December2006

                                                                                                                    1 of 6
Introduction

On the 30th November 2006, Sterling reached its highest level against the US dollar in 14 years. During currency
trading, according to HSBC, sterling / dollar exchange rates touched $1.97, before retreating to $1.9626, a 0.8%
rise on the day. The excitement generated by the press on this news is partly due to the unexpected nature that
the exchange rate rise occurred. This level of currency activity is of obvious impact to currency traders. However,
what impact does it have on the UK economy and to Scottish Tourism?

The Impact of the $1.97 Dollar to Scottish Tourism

In response to the question in the introduction, the impact in the medium term (2 to 5 years) is negligible (subject
to there being no major shocks). The forecasts provided by Oxford Economic Forecasts and Royal Bank of
Scotland show that exchange rates will remain around the $1.85 region until Q4 2007. This translates to an
approximate 2% to 4% growth in the US market to the UK (based on VisitBritain projections). For the next month
or so, impulse travellers to Scotland from America may be put off by the exchange rate and UK visitor numbers to
the US may increase for the shopping opportunities; however tourists that have planned to come to the UK will
already be committed to travel and the exchange rate will be an unfortunate but inescapable part of their travel
spending.

The Fall of the Dollar

The longer term issues over the dollar exchange rate are due to the ongoing concerns of the US economic
slowdown. It would be fair to say that Sterling’s gains against the dollar are due to the dollar’s decline against the
world currencies. Increasing interest rates around the world (Europe and Japan mainly but also the UK), brought
on by economic growth have increased interest in monetary vehicles other than the dollar. Poor economic data
from the US, which has left the Federal Reserve with the decision to halt or lower interest rates to stimulate the
economy, has also had an impact on the dollar exchange.

The charts below show the dollar exchange rates against Sterling and the Euro for 2006. Increasing energy costs
in the middle of the year pushed dollar rates up as the US spent more on importing oil adding to the increasingly
unsupportable trade imbalance (6.6% of GDP). The growing economies of Europe and Japan have maintained
the exchange rates at the levels shown for the second half of the year.




                                                          12 Month Sterling / Dollar Exchange Rate (Source: BBC)




                                                                                                                 2 of 6
                                                            12 Month Euro / Dollar Exchange Rate (Source: BBC)


China has built up foreign reserves in excess of $1000bn, of which 70% is in US dollars. China’s trading partners,
particularly the US say the Chinese renminbi is undervalued. Should the renminbi strengthen this would drive
down the US current account and ease pressure on the dollar. China sees the problem as an overvalued US
dollar and could seek to replace its dollar holdings into other reserves (such as the Euro, Swiss francs, Yen or
gold). With such high dollar reserves and a lucrative export market such as the US, China is caught in a paradox
of being able to threaten the US with fiscal pressure whilst seeing their dollar holdings devalue as a result.

What does this mean?

While no one can predict the course of currency markets, the pressures on the dollar are growing. Analysts have
been speculating for many years that a rebalancing of the dollar is necessary to readdress the growing current
account. Forecasts from RBS and OEF show that up to 2007 exchange rates will be around the $1.80 to $1.90
mark until the end of 2007. It should be noted that the forecasts are based on no unexpected shocks such as
major environmental, political or economic events which could alter global markets. Whilst dollar exchange rates
remain low insular domestic spending by the US consumer may be beneficial as this will promote US
manufacturing and domestic production and therefore begin to lower the trade imbalance. The downside is that
exporters to the US will suffer as their goods will remain high priced, affecting their home economy. The US
consumer is still increasingly indebted and the housing market is finely balanced to either burst or deflate gently.
Economic growth in the US is slowing and this is adding to the short term reactions of the currency markets.
Longer term outlooks are not as pessimistic for the US and this is reflected in the forecasts given by RBS/OEF.

For 2007/8, growth rates for US-bound tourists are predicted at 2%-4%, however spend may be slightly muted
due to the domestic situation. Careful monitoring of the US economy is necessary to watch for any tipping points
(rising energy costs, changes in inflation, interest rates and exchange rates) to pre-warn of any possible collapse.
Only a few pessimistic analysts are predicting a recession in the US for 2007. From a tourism perspective,
preparation to promote discounted travel fares, observing possible travel packages (which can be bought in dollar
therefore avoiding inflation, with the agent taking the rate disparity) and ensuring the US visitor is aware of the
savings that can be made on Scottish attractions (free galleries, city passes etc), therefore any expense can go
towards specifics (upgrading in restaurants, visits to specific charged attractions like Edinburgh Castle). This will
maximise experience and revenue.




                                                                                                                3 of 6
Moffat Model Forecasts

The impact on Scottish tourism of the fluctuating dollar exchange rate was modelled using the Moffat Model. Two
scenarios were developed; firstly a benchmark model (“Benchmark”) was run showing the current trend for US
tourism arrivals and spends. Using the forecast exchange rates from the Royal Bank of Scotland (RBS), a
second scenario (“RBS Exchange Rate Forecasts”) was developed showing the effect the lower dollar exchange
rate on US tourists.
The RBS Exchange Rate Forecast is shown in Table 1. As detailed in the preceding analysis, the rate of
exchange with sterling fluctuates from $1.80 to $1.90. Details of the exchange rates from Q1 2005 are also
shown for reference.


Table 1: RBS Sterling Exchange Rate forecasts for US Dollar.


                                   Period                         $ per £
                     2005              Q1                          1.89
                                       Q2                          1.79
                                       Q3                          1.77
                                       Q4                          1.72
                     2006              Q1                          1.73
                                       Q2                          1.85
                                       Q3                          1.87
                                       Q4                          1.87
                     2007              Q1                          1.87
                                       Q2                          1.89
                                       Q3                          1.83
                                       Q4                          1.83
              Source: RBS Group Economics Interest and Exchange Rate Forecasts (November 2006)




The figures generated from the Moffat Model are shown in Table 2. The data shows arrivals and spend from
2003, with figures prior to 2006 representing the published figures from the IPS (International Passenger Survey).
Figures in italics are the forecast figures. To assist in analysis the figures have been charted (Charts 1 and 2)
using a four point average trend (average value for each year). This trend provides a guide for growth but does
not represent actual value as represented in Table 2. The chart trends show an undulation around the second
half 2005. This undulation has been associated with a four year growth and decline pattern which can be seen
over a longer time series. IPS figures have shown a decline in US visitor arrivals and spend for the past four
years which the Moffat Model has incorporated and predicts will start on an upturn from 2006. With the exchange
rates effect, the difference between the predicated cyclical upturn and the forecast is illustrated within the charts.




                                                                                                                 4 of 6
Table 2: Moffat Model Forecast for US visitor volume and value 2003 – 2008

                                                                                  RBS Exchange Rate
                                                           Benchmark                  Forecast
                                                                Real Spend                  Real Spend
                                            Period   Arrivals     £ (000)        Arrivals     £ (000)
                                            2003-1    45843        13408          45843        13408
                                            2003-2   107289        59346         107289        59346
                                            2003-3   189237       108973         189237       108973
                                            2003-4    71425        31652          71425        31652
                                            2004-1    44847        14624          44847        14624
                                            2004-2   112286        61075         112286        61075
                                            2004-3   182930       139210         182930       139210
                                            2004-4    65092        35077          65092        35077
                                            2005-1    36205        11319          36205        11319
                                            2005-2   102669        42803         102669        42803
                                            2005-3   155252        89598         155252        89598
                                            2005-4    50236        29447          50236        29447
                                            2006-1    37572        20170          37572        20170
                                            2006-2   117670        62960         112880        54664
                                            2006-3   201360       118200         193070       102460
                                            2006-4    70574        40440          68213        36024
                                            2007-1    39908        21477          38647        19257
                                            2007-2   121240        64802         116650        56838
                                            2007-3   208150       122620         205850       118060
                                            2007-4    73552        42685          72877        41369
                                            2008-1    41378        22425          40861        21487
                                            2008-2   125080        66972         123100        63445
                                            2008-3   213660       125440         209580       117490
                                            2008-4    75117        43230          73436        40031



From charts one and two, the benchmark scenarios show a marked growth through 2006 for arrivals and spend
that plateaus through 2007 and 2008. For the Exchange Rate scenario, the average $1.85 to £1 rate shows a
slower growth over the same period. For the period 2006 to 2008 the difference in the number of arrivals
between the Benchmark and Scenario 2 is 28729 visitors; the difference in the Real Spend is £52.9 million.

Chart 1: USA Visitors Real Spend Moffat Forecast.
                                          USA Real Spend Moffat Forecast (4-point Average Trend)

                                  70000
             Real Spend £ (000)




                                  65000
                                  60000
                                  55000
                                  50000
                                  45000
                                  40000
                                    20 -4

                                    20 -1
                                    20 -2
                                    20 -3

                                    20 -4

                                    20 -1

                                    20 -2

                                    20 -3

                                    20 -4

                                    20 -1
                                    20 -2

                                    20 -3

                                    20 -4

                                    20 -1

                                    20 -2
                                    20 -3

                                    20 -4
                                    20 -1

                                    20 -2

                                    20 -3
                                         -4
                                       03

                                       04

                                       04
                                       04
                                       04

                                       05

                                       05

                                       05

                                       05

                                       06

                                       06
                                       06

                                       06

                                       07

                                       07

                                       07
                                       07

                                       08
                                       08

                                       08

                                       08
                                    20




                                                                       Date (Quarter)

                                                           Benchmark         Exchange Rate Forecast (RBS)




                                                                                                            5 of 6
Chart 2: USA Visitor Arrivals Moffat Forecast.


                           USA Arrivals Moffat Forecast (4-point Average Trend)

                      120000
                      115000
                      110000
             Volume




                      105000
                      100000
                       95000
                       90000
                       85000
                       80000
                             -4


                             -2


                                        -4


                                                  -2


                                                  -4


                                                              -2


                                                                        -4


                                                                        -2


                                                                                  -4


                                                                                            -2


                                                                                            -4
                           03


                           04


                                      04


                                                05


                                                05


                                                            06


                                                                      06


                                                                      07


                                                                                07


                                                                                          08


                                                                                          08
                        20


                        20


                                   20


                                             20


                                             20


                                                         20


                                                                   20


                                                                   20


                                                                             20


                                                                                       20


                                                                                       20
                                                         Date (Quarter)

                                             Benchmark      Exchange Rate Forecast (RBS)




                                                                                                 6 of 6

				
DOCUMENT INFO
Shared By:
Stats:
views:245
posted:10/24/2008
language:English
pages:6
docstalk docstalk
About