No. of Recommendations: 1

Let me be clear that, contrary to my behavior in equities, I am not a "currency trader". My positions change very infrequently and are generally entered on a purely macroeconomic basis when comparing historical (and perceived future) valuations to the US dollar (my native currency).

The two primary currencies which I hold are a long term position in Swiss Francs and a more recent (couple of years old) position in Australian dollars (and a much smaller very recent position in Canadian dollars). At various times I have held opportunistic positions in a small handful of other currencies, but that's the exception rather than the rule.

The Swiss position was chosen as a stronger sister of the Euro. When I opened it a number of years ago, it paid decent interest (now it's at about 1.25%, just like here). The Aussie, on the other hand, was opened when I noticed that it had been bashed down like a whack a mole during the late 2008 (IIRC) meltdown. In addition, I repriced it about a year ago into a term account paying 8% for 5 years. While both have fluctuated over time, neither one owes me anything (especially the Aussie which has appreciated substantially (besides paying rent).

The rational is that since my primary assets are in dollars, this strategy offers a hedge as well as the geographic diversity hedging each other (as the CHF follows Europe and the AUD follows Asia). It also provides geographic diversity in another sense as they are domiciled abroad (yes, I report and pay to the IRS :-) and in the slight possibility of a catastrophe in the US financial system will protect at least a portion of my assets.

When I do my asset allocation and assessment, I do not consider these to be "cash" (that's US dollars), but rather a separate class in the sense that equities and bonds make up separate classes. While they are "fixed income", since currency translation can cut either way, they differ substantially from US fixed income vehicles.

I won't bore you with the rational I use to select specific currencies (unless you want :-), but as I have about 20% of my assets involved in this, I tend to pay a lot closer attention to currency valuations/ratios and foreign news than most.

While this strategy may not give some the "warm fuzzy felling" that it gives me, PolymerMom's alternative of foreign bond funds is another way to participate. I would, however, caution that foreign currency accounts at Everbank are NOT the same thing in the same way that a derivative is not physical gold (and in fact, they pay subpar interest anyway). Their accounts are in reality valued in USD (though they may report in terms of foreign currencies) and are domiciled in the US in order to qualify for FDIC insurance.

In any case, while I have opportunistically used currency ratios to point me towards trading actions in the US (which have ranged from shorting the Euro, entering TBT for short periods, buying/selling gold and so on), if you think that you are bucking big boys with deep pockets when you trade stocks, wait till you see who the competition is in currencies :-)

Be VERY careful to backtest your models as it is too easy to make an assumption about currency movements over a short period of time when they may be influenced by specific political or economic pressures. An easy example is the movement of the Euro against the Swiss Franc. Over long periods of time, the Swiss Central Bank has bought Euros in order to keep the CHF low. Once in a while, they stop for a bit and the currency ratios can swing a lot. Then they may start buying again (without notice) and the pendulum swings back. The apparent cyclical graph is purely based on one party’s philosophy (and ability to maintain the burn rate required) and if things change, all of a sudden stuff happens that is outside of the model. In reality, this condition is the “norm” except that most times the ratio is contrived by a central bank. Not understanding these relationships can spoil your whole day on occasion.

Currencies can swing violently for short periods of time and I have decided that the most prudent action on my part is to choose a strategy that is likely to pan out over the years, rather than try to pick fights with central banks by forex trading.

OTOH, if you’re missing excitement in your life .....

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.