Smart Travel Through Geographic Arbitrage
Traveling is pretty awesome. You get to see new vistas, taste new dishes, and experience new cultures. The biggest problem with traveling the world is that it can cost a lot of money. But it doesn’t have to. Since I try to be a value conscious consumer (VCC) in everything I do, I also focus on getting the best value proposition on overseas travel.
If you have explored the far off travel destinations of the world from your computer screen, then you know one way to travel on the cheap is to visit countries that tend to be inexpensive. I’m talking about places like eastern Europe, Southeast Asia, Central America and South America. The kind of places where you can stay in a hotel for under $20 per night or rent a simple apartment for $400 per month. Or get a decent meal in a restaurant for $2-5.
Finding a cheap place to visit isn’t particularly challenging. Just book a ticket to Thailand, Mexico, or Chile, grab your passport, and go! But there is a way to stretch your travel dollars even further while vacationing overseas.
In the Root of Good family, we have been diligently thinking about where in the world we want to travel this summer. The initial list included east coast USA and Canada, Southeast Asia, and Latin America/South America. We have since added Europe (probably Spain) to the list of potential vacation spots. The list is very broad at this point and includes generally low cost areas (with some exceptions like parts of Europe and Canada and the eastern US).
To make a decision on where we want to go, we are focusing on a number of different factors such as cost, weather, flight duration, political stability, language familiarity, food, ease of getting a visa, scenery, and sites of historical significance.
I want to focus solely on “cost” in this post. And particularly the impact of foreign exchange rates. When you travel overseas, you spend money from your own country by exchanging your money into a local currency (euros, Thai baht, or pesos for example). For most readers of Root of Good who are based in the United States, you would be converting the US dollar into euros, bahts, or pesos.
One trick to finding a great value for overseas travel is to find a currency that has lost a lot of value relative to your home currency. I stumbled upon a blogger that is enjoying a mini-retirement in Chile right now (the name of the blog escapes me at the moment!), and he mentioned the weakness of the Chilean peso (or the strength of the US dollar when you are buying Chilean pesos). He further commented that the recent “scare” in emerging markets has led to a slide in most emerging market currencies relative to the dollar.
When I hear something like this, I think “arbitrage opportunity”. If I can find a country that’s currency has been beaten down (for whatever reason) then that means everything in the country is on sale with a built-in discount. Then I can find good deals on lodging, transportation, and food within the country to make a trip even more affordable.
I surfed over to finance.yahoo.com/currency-investing to check out just how weak the Chilean peso and other currencies really are right now. The yahoo finance site lets you “compare” a lot of currencies on one chart. I chose to compare the Chilean peso, the Mexican peso, the Peruvian nuevo sol, the euro, and the Thai baht. I wanted to see exactly how much the US dollar has appreciated against the foreign currencies of places we might visit this summer.
To summarize the graph, here are the one year changes in valuation of the currencies I observed:
US Dollar Vs. Foreign Currency Exchange Rate
|Currency||Dollar's Strength Vs. Foreign Currency (1 yr. change)|
|Peruvian Nuevo Sol||+9%|
Over the course of the last year, the US dollar has appreciated against all the currencies listed except the euro (which maintained the same exchange rate versus the dollar).
That guy in Chile was right! The Chilean peso was the hardest hit currency in the basket of currencies I checked on. The US dollar has appreciated 17% over the last year compared to the peso. In February 2013, USD $1 would get you 470 Chilean pesos. In February 2014, the same $1 can be traded for 551 Chilean pesos.
To me, Chilean pesos might as well be saltine crackers. I don’t have any intuitive concept of what they are worth. To look at a great example of what this weakening of the Chilean peso means in practice, let’s consider lodging costs for a month in Chile. I checked craigslist and found a nice two bedroom apartment in Santiago, the capital city of Chile, that would accommodate the Root of Good family. I didn’t research it thoroughly, but it seems to be in a safe area (Tarapacas), near the subway and bus lines, and convenient to shopping, dining, and pretty much everything in Santiago, Chile. And it’s on a sweet, tree-lined pedestrian mall. It’s 1,000 square feet, with very modern interior furnishings. The kind of apartment that would easily rent for $4,000+ per month in Manhattan in New York City.
The rental price in Chilean pesos is CLP 350,000 per month. One year ago at CLP 470 per dollar, the apartment would cost USD $745 per month (350,000 / 470 = 745). At today’s exchange rate of CLP 551 per dollar, the apartment is only USD $635! That’s a $110 savings just from the shift in the Chilean peso/dollar exchange rate after one year! That is only the savings on one month’s rent.
Apply the exchange rate savings across all travel related spending categories like local transport, entertainment, alcohol, restaurants, and groceries, and you’ll find that a USD $2,000 monthly budget in Chile one year ago only costs USD $1,700 today.
The other emerging market countries in the chart also experienced a weakening of their respective currencies versus the dollar. The dollar gained 5% versus the Mexican peso and 9% versus the Peruvian nuevo sol and the Thai baht. You won’t save quite as much today compared to one year ago in those three countries as you could in Chile. But those three countries are still “on sale” versus one year ago.
The one currency in the table that didn’t weaken against the dollar was the euro. It remained unchanged at 0.74 euros to USD $1. We have been patiently awaiting a weakening of the euro for years, and unfortunately it hasn’t budged much. This doesn’t mean Europe is a horrible value today compared to a year ago (it’s virtually the same, after all). What it does mean is that the emerging market countries are much better values for vacations right now compared to Europe. Not only are the emerging market countries cheaper in general, but they are even less expensive today due to weakening foreign exchange rates.
Visiting a country with a weak currency means you get a great value while you are there. You can always visit other countries with stronger currencies later. Why not take advantage of the opportunity presented by a weak currency right now?
If you happen to like this way of searching for whole countries on sale, keep in mind that inflation can complicate your search. High inflation in a country with a weakening currency can offset any foreign exchange savings you might enjoy. Let’s take Mexico as an example.
Even though the dollar gained 5% against the Mexican peso over the last year, the inflation rate in Mexico partially offset some of that strength. It’s really the relative inflation rate that’s important. The US inflation rate over the last year was 1.5%. In Mexico, it was 4%. This means prices in Mexico (denominated in pesos) increased 2.5% more than prices in the US. Of the 5% strengthening of the dollar, 2.5% of it (or roughly half) is lost to higher inflation in Mexico.
Let’s look at a meal in a restaurant in Mexico. One year ago it might cost 100 Mexican pesos for a nice sit down meal. That would be USD $7.89 at the exchange rate at the time. Today the meal has increased by 4% to 104 pesos. That would only cost USD $7.81 at today’s forex rates. Even though the price went up 4% in peso terms, it dropped 1% in USD terms! All while prices in the US have increased by 1.5% over the last year.
The other countries in the table only experienced 1-3% inflation, which means the foreign exchange savings of 9-17% for Peru, Mexico, and Chile way more than offset any slightly higher foreign inflation.
If you see a currency that depreciates by 20-30% versus the dollar, make sure the country isn’t experiencing steep inflation. You’ll actually be worse off if you get 30% more of a currency due to forex rate changes, but the country has experienced 50% inflation over the same time period (hi Argentine peso!).
Traveling For Less
We have a budget of around $5,000 for our 1-2 month long summer trip. By choosing to visit countries that have currencies suffering from weakness right now, we can stretch our dollars even further. And in a few years, there’s a good chance somewhere else we want to visit will be comparatively inexpensive due to a weak currency. That’s what I’m calling “geographic arbitrage” – finding destinations with short term currency weakness and choosing those countries as your next travel destination.
To keep costs even lower, we also plan on using our Starwood hotel points at Sheraton hotels and airline frequent flyer miles we accumulated over the last few years. I’m also signing up for a pair of Barclay’s Arrival cards for me and Mrs. Root of Good. The Barclay’s Arrival card offers a bonus of 40,000 miles that you can redeem toward any $400 travel purchase. A Barclay’s Arrival Card for me and Mrs. Root of Good would mean $800 off any of our flights, lodging, rental cars, or ground transportation.
Will we end up going to Chile just because our US dollars buy 17% more pisco sours (denominated in Chilean pesos)? It will certainly factor into our decision, but we aren’t just bottom-fishing for the best value on the planet. We do want to actually enjoy ourselves while on vacation. And after I cleverly brainstormed Chile as an awesome place to spend the summer, I realized Chile celebrates their summers during our winters and their winters during our summers. If that’s confusing, just know that it has to do with rotational tilt of the earth, solar geometry and other nuances of astrophysics that are beyond the scope of an already confusing article on foreign currency exchange rate arbitrage.
In other words, it might be chilly in Chile if we visit in July. Perhaps the eponymously named Ecuador (situated closer to the equator and therefore warmer) might offer a more comfortable environment for drinking, eating, relaxing, and exploring. Or Peru or Mexico or Thailand.
Have you ever traveled on the cheap by taking advantage of temporarily depressed currencies?
photo credit: flickr Malojavio El Saucejo creative commons