Sunday, 30 September 2012

Is Now a Good Time to Invest in Currencies?

If you are looking to invest your money somewhere, currencies like the Euro or the U.S. dollar may not be the best option for you right now. Although currencies have always been a significant component of pension funds in countries like the U.K. and the U.S., since the market crash of 2008 currencies have had a less than stellar performance as an investment instrument. Up until the crash, a successful investment strategy was to borrow in a currency that had a low yield and use that money to invest in a currency that had a high yield. That story changed after 2008. In terms of performance, last year was perhaps as bleak as it would get for top currency indices.  Considering the debacle in which the European Union is right now, it might not come as a surprise that the Euro has been getting weaker and weaker every month for the past twelve months. Here is a chart highlighting the Euro’s performance against the Canadian dollar for the past five years:

For those Europeans who saw this coming, even as late as six months ago, a good investment strategy would have been to get into a currency future. A currency future is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. 

Economics 101 tells us that the above graphical trend makes European imports cheaper for Canadians and Canadian exports more expensive for Europeans. Luckily for Canada, exports make up only 29 percent of the country’s GDP. That somewhat explains why Canada’s GDP continues to grow despite the adverse global conditions. Moreover, the USD-CAD exchange rate has been hovering at around parity for almost a year now (see below). Despite Canadian exports becoming more expensive for Americans, the United States continues to be Canada’s biggest trading partner. With the Canadian dollar being as strong as it is, it would be to Canada’s advantage to form ties and trading agreements with emerging markets as opportunities for trade are aplenty across the Pacific and Atlantic oceans. 

Individuals looking to invest in currencies can also use the same proposed strategy on a micro level.  Analysts say pension funds are nowadays “investing in emerging market currencies, though this is currently more popular among UK funds than those in the US”.

The Bottom Line:

If you are thinking of investing in currency these days, it is much better to expand your horizons and invest in emerging market currencies rather than one of the top currency indices. In the long term this is a much better investment strategy, as returns on these sorts of currency investments are expected to be considerably high according to experts and trends. 

Ali Kazerani

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