Friday, 14 February 2014

FOREX a Jolly Good Fellow

Currency hedging works.

My home currency is Australian dollars (AUD). Growth on a (hypothetical) Singapore (SGD) portfolio from September 2012 to present was a piss-poor 0.43%p.a.. This is made more apparent when placed against a 0.5%p.a. Fixed Deposit rate for a similar sized cash amount.

However, in that time, the Singapore dollar has moved from AUD$0.78 to $AUD0.88. This has compounded, nay, super-compounded the growth!

Value (SGD)FOREX (SGD-AUD) Value (AUD)
24 Sep 12 $5,947.80 0.78149 $4,648.15
14 Feb 14 $5,983.30 0.87783 $5,252.32
Δ 0.597% 12.33% 13%

In this case, currency shifts have spiced up a lacklustre portfolio. But the opposite could happen. A falling SGD could offset any stock market gains or reverse them once converted to Aussie dollars. I think this is happening in emerging markets right now. The Fed taper is decreasing demand for emerging markets and therefore currencies. The recent fall in emerging market index funds reflects this. The Australian dollar, though safer than frontier currencies, seems to be on the 'developing' side of the world economy, with its strong links to China. It's certainly taken a beating of late.

This is why we invest internationally: to ameliorate the risk of a singular holding currency devaluing. Why, you may ask, does the Singapore dollar strengthen against the Aussie despite being in an emerging region? The SGD is not fully floated. Its strength is determined through a basket of currencies which includes the U.S. Dollar.

You don't have to open up trading accounts in every country you want a stake in. (Well, not anymore.) There are a bunch of global funds, like the Vanguard and iShares brands in Australia, that are happy to do that for you, all for the cost of their management fee. And because most of the funds come packaged as an ETF, you can trade them on the stock exchange and avoid the yucky business of meeting a financial planner.

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