The Australian dollar's higher volatility can be both a blessing and a curse.
The volatility of the Australian dollar creates uncertainty for investors by making investment returns harder to predict, especially for those with international exposure. It can also erode purchasing power, making imported goods and services more expensive for consumers and businesses. Additionally, businesses relying on imports face higher costs and increased challenges in financial planning due to fluctuating exchange rates.
However during times of distress, the Aussie dollar has been described as the "Great Australian Parachute"
A weaker Aussie dollar can boost export competitiveness by making Australian products more affordable for overseas buyers, benefiting industries like agriculture and tourism. It can also increase returns for international investors holding Australian assets and create opportunities for savvy investors to profit from exchange rate fluctuations.
At Valor, our studies of the Aussie dollar have led to the obvious conclusion that the currency moves in a pendulum fashion between the high of $1.10 and the low of 47.7c over the last few decades. The central point of this pendulum is approximately 75c.
Our analysis concludes that wise investors will use this pendulum motion to profit from the currency movements when the Aussie is high and ovoid the wrecking ball of a rising currency when the currency is lower. Like a skilled surfer, we help you ride the waves of the Aussie dollar's volatility, maximising gains and avoiding wipeouts.
With our currency license, we are able to hedge the currency when appropriate. Whilst many have a fixed hedging strategy, our dynamic hedging strategy allows for profits from a falling currency at higher levels and increased levels of hedging as the currency falls.
It is important to understand that the currency can lead to negative investment outcomes despite rising investment markets as seen in the 2001 to 2011 period. Knowing how to expertly manage these periods, either through repatriating funds or hedging the currency is an important component of portfolio management. Even Australian businesses with significant international exposure should be considered during different parts of the cycle.
Obviously currency does not compound in the same way a wonderful business can. An investment that can compound at 20% a year for 20 years can grow to over 37 times your initial capital. Currency movements, outside of hyper inflationary failed states, are highly unlikely to have much affect on an investment such as this. Thus, currency movements are less important the longer your time frame. Understanding your individual time frame and risk tolerance is important to managing currency risk.
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