Smart Travel Through Geographic Arbitrage

Perœu Hillside

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.

 

Geographic Arbitrage

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.

 

Foreign exchange rates 1 yr

 

To summarize the graph, here are the one year changes in valuation of the currencies I observed:

US Dollar Vs. Foreign Currency Exchange Rate

CurrencyDollar's Strength Vs. Foreign Currency (1 yr. change)
Chilean Peso+17%
Mexican Peso+5%
Peruvian Nuevo Sol+9%
Euro0%
Thai Baht+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.

Chile-apartment

The lovely tree-lined promenade outside the apartment in Chile.

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?

 

Beware Inflation

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

30 comments

  • MG@RETIREBEFOREDIE

    I love Chile…one of the best countries in south America. But you will be spending 900 or more each roundtrip flight ticket…PLUS they charge an entry fee to Americans of around $125 each, Have that into consideration since you can go to Peru for $500 or less and Mexico for $300. Well…that prices are from where I am, Florida. Where are you guys? PS: And yes…Chile is frizzing in July

    • We are in North Carolina. Our last visit to S America sent us through Miami. I’ll probably book reward tickets using airline miles, so Chile might only be a little more expensive in points than Peru. Mexico is probably a lot cheaper in points or dollars. And a much shorter flight!

  • This is a fabulous idea. I’ve never thought of picking travel destinations like this.

  • We used to travel that way by chance only (Greece in the 80s to visit family) but haven’t really done a detailed target or anything. I’ve thought about it though. It’s definitely a great way to stretch the money and find a place you might never have thought to visit!

  • Very smart thinking! I will definitely keep this in mind as I travel more.

    Also, for the record, Peru is amazing and would have my vote.

    • The wintertime weather in Lima seems pretty nice, so I think it gets added to the list. I imagine Cusco and Machu Picchu are chilly though.

      • I was in Lima in June and July of 2010. We spent the fourth of July in Cusco and a couple days later were at Machu Picchu. It was a little chilly but nothing crazy. I don’t remember the exact temperature but if I remember right I just wore some jeans and a light jacket for the late night / early morning mountain chill. For my two cents, I have traveled extensively and my two favorite places are Peru and Belize.

        • We might have to check Peru out a little more. I figured Cusco would be really chilly in the middle of their winter, but perhaps not? Good news for our future summer trips!

          We are leaning more toward spending a month in Canada since we will have a 2 year old with us.

          Before moving on to the Canada idea, we were looking at a Guatemala/Belize adventure for the month of July. But I think we have chickened out on that trip for this year.

  • Justin,

    Great thinking — that would certainly represent a nice discount in Chile right now!

    Since you’re into travel rewards, I wanted to pass along two things:

    1) I just published an article that might be of value to you. You can get up to 44 nights for free at Club Carlson hotels with just two credit cards.

    2) United has a great rewards chart to “Northern South America”, which includes Ecuador, Peru, etc. They only charge 40,000 United points per round-trip flight and there is usually good availability since they have a ton of partners. Easy to come across them through Chase Ultimate Rewards transfers and United credit cards too!

  • Travel in general is an area that I want to explore and expand my knowledge much more. I’d never thought of this particular technique. Hopefully soon there is some more time to start studying this in depth. Travel hacking in general seems quite appealing. Very interesting!

  • Chile was on our list of possible destinations, for sure. There is unfortunately a $160 per person charge, though this is the case with a lot of South American countries:

    http://chile.usembassy.gov/entryandexit.html

    Peru, Ecuador, and Bolivia don’t charge the fee, but I think most of the other countries on the continent do.

    Fantastic article on the advantages that you can enjoy with some slow travel, Justin. I may be in Peru for 2-3 months this spring/summer, too, and I’m hoping to enjoy some of those same benefits. Here’s to hoping for a currency adjustment on Soles. 🙂

    • I remember Argentina instituted the fee right after we booked our flights but before we traveled. We escaped the fee somehow. I think Uruguay is still fee-free, but I’m not sure. The various visa/entry fees will factor into our decision of where to visit for sure. $160×5 = $800. That can go a long way in another country. I wonder if they charge the entry fee on land-based entries? I think some other S American countries only charge the entry fee at the airport.

  • I do something slightly different, but I can afford to do it because I travel often, and have a relatively large “bucket” of money I can use to do it (that, and I can usually get work to cover the exchange fee!). I travel mostly to Europe, and when the dollar is strong against the Euro, I exchange more Euros than I need, then spend them when the dollar is weak against the Euro. It’s more time arbitrage than geographic arbitrage, but it helps. I just end up with a lot of Euros sitting around the house until I use them. I generally only exchange $4-600 at a time though, depends on plans and such. Right now, I have $480 in Euros at the house that I got a few years ago when the Euro “crashed” for a bit – it’s going to be used for our trip this October. It’s still a bit of gambling with what the exchange rate might be at any given time.

    • I almost did that when the Mexican peso went from 12 to 15 per USD 4-5 years ago. I didn’t execute the transaction since I wasn’t sure when we would be heading south of the border.

  • ROG,
    I spent a month backpacking in Argentina back in 2002 just after their financial crisis. It was a terrible crisis for their citizens, but awesome for me. In a matter of a few months, the Argentine dollar went from being pegged to the US dollar 1 to 1, to being worth about 1/4 of a dollar. Or 1 US dollar bought 4 Argentine dollars. In other words, every $2 beer I drank cost me $.50. Their incredible buffets were going for $2 for lunch and $3 for dinner. Sounds too good to be true, but that’s the way it was, until inflation kicked in. After a year prices normalized. This also happened in SE Asia in 1997-1998. I’ve been waiting for someone to make this the focus of a blog post because it is THE best way to travel cheap. Follow the crisis.

    -RBD

    • I think there’s potential to travel on the cheap in Argentina right now if you’re holding US dollars. You can exchange them on the “blue market” on Calle Florida in downtown for 50% more than the official rate. I haven’t checked lately but recently it was 12 pesos per USD unofficial, 8 pesos/USD official rate. No $0.50 beers, but $1 beers are waiting down there for you! When we were there 4 years ago, the beer was relatively cheap anyway. Maybe $2-3 for a big 40 oz beer you share with your table mates. Many times, cheaper than water or soda. 🙂

  • Nice analysis, Justin! It’s a great idea, too bad it will be chilly in Chile for your summer vacation though. We’re trying to decide on a summer/fall vacation this year too. I’m churnin’ the travel cards as we speak so that should help us out. I’ve also been patiently waiting for the dollar to gain a little on the Euro too, but it’s been fairly stable since our honeymoon to Italy 6 years ago.

    • We are leaning more toward Spain and Portugal at the moment, in spite of the Euro’s strength vs. the dollar. Of western European destinations, those two countries seem fairly inexpensive.

  • I really never consider exchange rate too much. I would usually go on holiday after the kids are back in school, so the fares and costs would be cheaper. I take dollars and change as l go. Whatever is left, l save it for next time (pounds and euros only). Pretty much everywhere else, the dollar is usually stronger so l never worried. Another advantage l had was l had family in so many places, so we would just exchange money . Interesting way to look at things.

  • A post after my own heart 😀

    As you know we are pretty much just roaming the planet where our whims take us, and it turns out it is a pretty cheap way to go. The currency differences in many developing countries reduces our average costs, as does the lower cost of labor. But perhaps the #1 thing for cost savings is just traveling slowly… Not having airfare or other transportation costs, or averaging them over many months instead of a couple weeks, for example. You can also negotiate lower rent if you stay for 3 months instead of 3 weeks

    Traveling a bit off season or off peak times also helps. Everybody wants to fly out on Friday or Saturday? We most recently flew on a Tuesday. Everybody wants to visit Mexico in Jan – Mar? We were there in Oct – Dec and it was fantastic, and rents were as much as 50% off the peak times

    I also like to look at cost of living comparisons (www.numbeo.com is a good site) and also at how much other expats spend, since it is unlikely that we will ever be able to totally immerse in the local economy. This is why we publish 100% of our own spending, so others can see at least one real example of cost of living in various countries

    • Thanks for the detailed response, Jeremy! That numbeo site is cool. I’m going to have to explore it a little more and it might generate some additional destinations (and rule out some others).

  • In Guatemala $1 used to buy you one quetzal (GTQ) 30 years ago and now it buys you 8 GTQ but it has been pretty stable for the past 10 years. Rents are often charged in US$ and so are most hotel prices, you still get the currency advantage on food and transportation.
    Here the currency is cyclical, your dollars buy more in September and less in January for some reason, so you can plan your travel around that as well.

    • I hadn’t considered that some countries might have housing priced in USD, and hence currency devaluation would give no benefit to the US-based traveler. Good point, thanks!

  • “That’s a $90 savings just from the shift in the Chilean peso/dollar exchange rate after one year!”
    Surprised nobody mentioned it, but it was actually $110 savings from $745 to $635, so even better.
    Just started reading a couple weeks ago else I would’ve caught it earlier 🙂
    Really enjoying your blog so far, looking forward to catching up over the next few weeks!

    • I do math pretty well but can’t get it right all the time. 😉 Thanks for catching that error, and now I’m going to edit it away stealthily. Glad to have you as a new reader. Welcome!

Leave a Reply

Your email address will not be published. Required fields are marked *