Building upon our recent video post, which detailed Australia’s strong fiscal currency standing, it’s fair to say that all Australian investors with foreign holdings should be looking to protect themselves from any potential foreign-currency risks.
Fluctuations in the value of currencies can directly impact your investments, and these oscillations affect the associated investment risks — sometimes these risks work in your favour, other times they do not. Any international investments are great strengthening mechanisms for your portfolio, but there fluctuating exchange rates that can jeopardise an overall return. If, for example, you’ve expanded into foreign stock, bonds, goods or properties, there are a few potential solutions to downplay any negative effects.
Hedge your bets
Considering the strength of the Australian dollar, you won’t lose any money if the currency your investment is in falls, but you won’t gain anything if that currency appreciates.
There are two ways to hedging foreign assets could work in your favour: Buy a currency-hedged mutual fund, or invest in an exchange-traded fund. By doing so, you’ve navigated the risk away from your investment and only have to worry about stock market returns.
Always look for high interest rates
By purchasing the currency of a country that has a higher interest rate, or buy owning government bonds, you could enjoy a small return simply by holding certain foreign currency in a bank account. This is made more difficult for Australian citizens as countries like the USA store cash by holding the Australian dollar and making a return.
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However, you should note that this kind of strategy does carry a risk. If a national interest rate drops, you can see a loss. But if another country’s rises, you have a potential opportunity to transfer money overseas and enjoy a gain. Protect your money further with a trusted transfer service from an exchange specialist like Travelex.
Invest in the currency market
Demand for foreign stock has a positive effect on the price of international currencies. The foreign exchange market is dedicated to the trade of foreign currencies and there are several ways to invest — all of which present unique opportunities and potential risks.
You can trade currencies direct, setting up your own accounts in the process, or you can look to hire the services of a professional broker. However, currency trading is more suited to those capable of handling any potential losses. In fact, investors looking for exposure to currency investments might be best served acquiring them through exchange-traded funds. Some exchange currency funds are designed to exploit the trend associated with high interest rates and can therefore provide a suitable outcome. However, you do need to factor trading fees and taxes into your budget.
Buy undervalued currency
To identify currencies that have been undervalued, start by looking at a country’s current account deficit; this is the difference between what is imported versus what is exported. If a country has a sizable discrepancy, it could be that the currency has become uncompetitive, which would then suggest that it may be overvalued and will fall.
High inflation in regard to another country can place pressure on currencies and force down competitiveness but again, the world of international currencies is a complex one and not tackled easily.