Investment strategy side-step inflation using forex – MoneyWeek

Theforeignexchange(forex)marketisalsohuge–dailyturnoverisabouttentimesthatofglobalequitymarkets–andveryliquid,sodealsofallsizesandinvirtuallyallcurrenciescanbedonequicklyandeasily?

And,asDavidStevensonintheFTnotes,thankstolotsofcompetitionbetweenforexbrokers,bid-to-offertradingspreads(tradingcosts,inotherwords)arenowtinycomparedwiththemostliquidofequitymarkets?

Eventhetraditionalargumentagainstcurrencies,thatexchangeratesaretoovolatilefortheaverageprivateinvestor,doesn’tnecessarilystackup。

Thethree-monthvolatilityofeachmajorcurrencypairsince1999,forexample,fallsintoarangeofbetween5%and15%,saysStevenson,which,comparedwithmanyindividualequities,is“fairlytame”。

So,thereareplentyofreasonstolookatforeigncurrencyasanassetclass,butwhat’sthebestwaytoinvest?

Forexinvesting:currencyspreadbets

Spreadbettingfirms,suchasCMCMarketsandCapitalSpreads,offerforexbets。

Chooseacurrencypair,saysterling(GBP)againsttheUSdollar(USD)。

Thisisquotedasthe“GBP/USDpair”。

Youbuyitifyouthinkthepoundwillrise(strengthen),andsellitifyouthinkthepoundwilldrop(weaken)。

Youthendecidehowmuchtobetperpoint(apointrepresentsthelastdigitinastandardquote)。

So,forexample,youcouldbuytheGBP/USDpairfor£5perpoint,havingbeenquotedaspreadof1。

9850/1。

9853。

Ifsterlingstrengthensyoumightcloseyourpositionbysellingthesamepair,nowquotedat1。

9865/1。

9868。

Yourprofitis12points(19865–19853=12),whichis£60at£5apoint,tax-free。

If,ofcourse,sterlinghadweakened,youwouldhavelostmoney?

Tradingindividualcurrenciesrequiresadecentknowledgeofthefactorsthatcouldinfluenceexchangerates。

Thebigoneisexpectationsaboutrelativeinterestrates–arisingBankofEnglandbaserate,relativetotheequivalentUSFedrate,wouldusuallymakesterlingattractiverelativetothedollarandpushtheGBP/USDrateup–butthereareahostofothers。

Also,sinceexchangeratescanmovequickly,biglossesarepossibleshouldabetonacurrencypairbackfire。

Forexinvesting?

currencyETFs

Forinvestorswhopreferabitlessrisk,therearenowincomeexchange-tradedfunds(ETFs)availablefromsomeAmericanfundmanagers,suchasWisdomTree,whichuseUSdollarsascollateralforaninvestmentin,amongothers,individualemergingmoneymarkets。

So,forexample,theaverageone-monthBrazilianmoneymarketrateiscurrentlyaround12%versusjust2。

3%intheUS(althoughtheseratescanchangequitequickly)。

TheBrazilianRealETF(NYSE:BZF)benefitsifthisgapwidens(whichalsosuggeststherealwillriseagainsttheUSdollar)。

AswellasthenewBZFETF,WisdomTreenowofferssimilarproductsbasedontheChineseYuan(NYSE:CYB)andtheIndianRupee(NYSE:ICN),withanexpenseratioof0。

45%。

Rememberthat,asaUKinvestor,youarealsoexposedtochangesinthesterling/USdollarrate?

Forexinvesting:mixedcurrencyfunds

Forthosenotkeenonsinglecurrencybets,whichcouldtakeabatteringshould“emergingmarketstakeadive”,saysStevenson,BarclaysGEMSfund(AMEX:JEM)givesbroaderexposureandlookslessrisky,beingdrivenbytheperformanceof15localcurrenciesacrossfiveregions,includingAsia,LatinAmericaandtheMiddleEast,againsttheUSdollar。

Thefundcomeswithaheftierexpenseratioof0。

89%。

Orthere’sthesomewhatclumsily-namedInvescoPowersharesDBG10currencyharvestfund(NASDAQ:DBV)。

Thisaimstomakemoneybyborrowinginthethreelowest-yieldingdevelopedmarketcurrencies(currentlytheSwissfranc,yenandUSdollar),fromalistoften,toinvestinthethreeofferingthehighestyield(currentlytheNorwegianKroner,andtheKiwiandAussiedollars)。

Forexinvesting:buyacurrencymanager

Ifyouwantawaytoprofitfromgrowinginvestorinterestintheforexmarket,butdon’twanttojoininyourself,youcouldtrysharesinacurrencymanagementfirm–suchasRecordplc(LSE:REC),runbyformerBankofEnglandeconomistNeilRecord。

Thegrouphasracedto$55bnundermanagement,hasimplementedanewfeestructurethatwillrewardabsolutereturns,andtradesonaprice/earningsratioofjustseven,whichmakesitlookadecentlong-termbet?

NakedTextNakedText