The Importance of Currencies

Currencies are an important consideration in investments.

First, exchange rates directly affect the investment returns for all non-U.S. investments. Second, the currency markets can provide insights on risk appetite and portfolio flows. On the first point, when you invest in a foreign market, you are simultaneously taking a currency position, whether you want to or not.

  • For example, to buy a Chinese stock, you have to first convert U.S. dollars into China’s renminbi/yuan to complete the purchase. When you sell the foreign equity, you will also be selling the foreign currency, to convert your gains/losses back to U.S. cash.

  • The total return from your non-U.S. investments is the sum of the local price return (with dividends) plus the currency return (i.e., the change in the value of the exchange rate during your holding period).

  • Non-U.S. investments result in two primary sources of risk. Investments outside of the U.S. can be particularly attractive when both the price and currency move in your favor. On the other hand, it can be very costly during periods of dislocation when both risks move against you.

On the second point, some currency pairs serve as a risk appetite measure. One of my favorites is the ratio of the Australian Dollar to Japanese Yen.

  • The Aussie dollar is a pro-cyclical currency, due to (i) the importance of commodities to the Australian economy, and (ii) Australia’s close ties with China.

  • Japan, on the other hand, has a defensive (or counter-cyclical) currency; it often behaves like a safe haven asset.

The chart below shows the behavior of AUDJPY of time. This currency pair has withstood the test of time as a fairly reliable risk-on/off indicator, as you can see.

article
AUDJPY from 1990 to 2020

The most important currency of all, of course, is the U.S. dollar. It is the reserve currency for the world and all commodity prices are denominated (bought and sold) in dollars.

The so-called big dollar -- to distinguish the U.S. dollar from the Euro dollar, Australian dollar, Canadian dollar and New Zealand dollar -- is often said to have an unfair advantage. When U.S. markets are outperforming, foreign investors flock to the U.S., driving up the strength of the dollar. When global markets are in dislocation, many U.S. and non-U.S. investors flock to U.S. assets for shelter, strengthening the value of the dollar.

Is a strong U.S. dollar good for the country? It’s a double-edged sword: on the one hand, a strong dollar makes imports cheaper…and we’re a consumer-based economy where many of our consumption goods are imported. On the other hand, a strong dollar makes our exports more expensive for foreign buyers. Our trade deficit would improve if the US$ were to significantly weaken.

Esoterica's statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. For full disclosures, click here.

Get the most lucid takes on where things are headed

Articles and educational writing for smarter investing.

How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio
How to Build a Three-Fund Portfolio

Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification
Asset Allocation for Diversification

How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles
How to Measure Economic Cycles

What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP
What Is GDP

How we can work together

See Our Solutions

Next

Generation

Investing

©2020, Esoterica Capital LLC (“ESOTERICA”). All content is original and has been researched and produced by ESOTERICA unless otherwise stated. No part of ESOTERICA’s original content may be reproduced in any form, or referred to in any other publication, without the express written permission of ESOTERICA. The content is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect to any products or services for any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence.



Certain of the statements contained on this website may be statements of future expectations and other forward-looking statements that are based on ESOTERICA's current views and assumptions, and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. All content is subject to change without notice. All statements made regarding companies or securities or other financial information on this site or any sites relating to ESOTERICA are strictly beliefs and points of view held by ESOTERICA or the third party making such statement and are not endorsements by ESOTERICA of any company or security or recommendations by ESOTERICA to buy, sell or hold any security. The content presented does not constitute investment advice, should not be used as the basis for any investment decision, and does not purport to provide any legal, tax or accounting advice. Please remember that there are inherent risks involved with investing in the markets, and your investments may be worth more or less than your initial investment upon redemption. There is no guarantee that ESOTERICA's objectives will be achieved. Further, there is no assurance that any strategies, methods, sectors, or any investment programs herein were or will prove to be profitable, or that any investment recommendations or decisions we make in the future will be profitable for any investor or client. Professional money management is not suitable for all investors. For full disclosures, please go to our Terms & Conditions page.