The exchange rate can serve as a symbol of economic strength for an economy and it is easy to get caught up in this symbolism. However there is much more to the story and as often is the case there are winners and losers from exchange rate movements.
Exchange rates are a particularly hot topic of discussion in my family. My wife is Indonesian and we make annual trips back to Jakarta to visit her family. For those of you who have travelled to Indonesia (or other areas of South East Asia) you will know that the shopping is great. Wives are saving their families thousands of dollars all over the region!!!! Even with these great savings to be had it is a natural instinct to want to squeeze the last cent out of your hard earned money. The first step along that path is getting the best possible exchange rate.
My parents are currently staying with us in preparation for visiting two of my siblings living and working overseas in London and Kuala Lumpur. If you have followed the recent movement of the exchange rates you will know that my parents are pretty happy with the exchange rate offered at the moment. This year alone has seen the following increases in the Australian dollar compared to other currencies:
· US Dollar - 2.50%
· UK Pound - 2.35%
· Indonesian Rupiah - 4.28%
· Trade Weighted Index # - 2.08%
My parents can now buy over 2% more UK pounds with their Australian dollars than they could have at the beginning of the year. The same principle relates to Australian investors buying overseas investments as well as individuals, businesses and companies who are purchasing goods and services from other countries.
However with every story there are also some who have fared less well with an exchange rate gain. These are the people who are trying to buy Australian dollars. This could be foreign investors looking to purchase Australian assets, Australians returning home with overseas investments or people looking to emigrate here.
What Does This All Mean for Investors?
At ?A Clear Direction' we believe that exchange rate movements have a couple of implications.
- Do we steer clear from international investments because of the risk of exchange rate movements?
- Do we ?hedge' our clients away from exchange rate risks by using global investments that have in built currency hedges against rate changes? or
- Do we try to capture this type of diversification in our portfolios by exposing some of the portfolio to exchange rate movements?
Our philosophy is to incorporate hedged investments in our high yield investments - international fixed interest and listed property. This protects these income sources from exchange rate movements. However we also look to expose investment portfolios to some exchange rate risk and diversification through using un-hedged international share funds.
# - The trade weighted index is an index calculated by the Reserve Bank of Australia based on the currencies of our major trading partners weighted in relation to the amount of trade that occurs between each of the nations. As such the Trade Weighted Index measures a basket of exchange rates important to Australia.