Investing in foreign currency can be risky for SMSF trustees as these investments don’t generate returns and investors are instead relying on other investors paying a higher price later on, according to GEM Capital’s Mark Draper.
However, holding foreign currency can offer benefits when used in different ways, as David Bassanese, the chief economist for BetaShares, explained to Nest Egg.
Foreign exchange exposure can offer portfolio diversification as the returns investors receive from this kind of investing aren’t generally correlated with equities and also typically have “lower risk and volatility” than shares, Mr Bassanese said.
“The key issue is that it’s another form of return which is not correlated with equity markets,” he said.
“For those who are more conservative and have a cash allocation, they may choose to have some of their cash in a foreign currency because a) just for diversification purposes or b) they have a view that the Aussie dollar is going to fall.”
Additionally, there are a number of ways investors can access foreign exchange markets, with the two most common being through a foreign currency bank account and a foreign exchange ETF product that can be bought and sold on the ASX.
Mr Bassanese said there are two things to look out for when considering buying foreign currency, the first being “extreme market overreactions” like those seen in the wake of the Brexit vote, when the British pound plummeted in price only to climb back to near its original price days later.
The other factor investors should look out for is long-term trends, with the US dollar’s cyclic fluctuations over the last 40 years being an example of this, as is the Australian dollar’s current strength relative the US dollar, Mr Bassanese said.
“I think the Aussie dollar, although it’s been range-bound around mid-70 cents, is eventually going to break below 70 cents and possibly as low as 65 cents in the next two to three years,” he said.
“From an investor point of view, if you wanted to capture some of that weakness of the Australian dollar, you can park some of your money in a US dollar account and get that upside.”