Recommendations to hedge against weakening AUD

[onlyann]

Hi all,

I have no much experience in investments.
My situation is that I have the majority of my portfolio sitting on a Savings Account.
I want to protect myself from a weakening Australian Dollar.
So far, my plan is to have a Forex account and open a long position on the USD AUD and hold that position for months. I know I will be paying swap fees for that.

What are the other investment options ?

I don't expect to need access to the money for the next 2 years.

Thanks for helping.

 

[prawn_86]

If you have AUD savings and no USD exposure, why do you care where the currency goes? What exactly do you need to hedge?

 

[onlyann]

I migrated from Europe a few years ago and I may return later on (EUR).

 

[prawn_86]

Unless you are operating a company the only way an individual can hedge small amounts is via holding cash, or a foreign currency account with your bank.

Generally you cannot hedge out past 12 - 18 months anyway, even as a company

 

[onlyann]

So my best bet is to send money overseas to my EUR bank account rather than take a position on the Forex ?

Thanks for your input.

 

[SuperGlue]

Open an Interactive Brokers account and have Eur as your base currency.

"Clients maintaining a margin account may change their base currency at any time through Account Management and may effect deposits or withdrawals in a non-Base currency. Base Currencies are available in AUD, CAD, CHF, EUR, GBP, HKD, JPY, MXN, NZD, SEK, or USD."


They'll charge for non active account & have no idea what interest rate payment is.

Just a thought & please DYOR, this is not a financial advice.

 

[prawn_86]

So my best bet is to send money overseas to my EUR bank account rather than take a position on the Forex ?

Thanks for your input.

If it is simple un-leveraged protection that you want, then yes. In theory the interest rate differential would negate any benefit of hedging via a forward contract

 

[Sharkman]

an alternative product called DCI (dual currency investment) may be worth considering

now it's been a few years since i moved overseas so i don't know how readily available these are back home, but they are all the rage in asian finance, they've really taken off here the last few years and their growing popularity has led to better rates nowadays

it's technically a structured product but is actually quite simple, basically it's an FX option dressed up as a high yielding deposit. you effectively sell the insto the option, but instead of paying you an option premium, they pay you in the form of a very high interest rate on your deposit. the caveat is that you must nominate an "alternate" currency, and at the maturity of the deposit, they can choose to return your deposit in either the currency you deposited, or the "alternate" currency converted at a strike price you select

the higher interest rate is, of course, below the fair value premium of the equivalent FX option - otherwise why would the instos be offering the product? so i don't think they're a good idea for taking a directional punt on a currency you aren't interested in, there are better ways of doing that which give up less money "to the house". but i do think they are a good solution if you don't care which of the two currencies you will be repaid in. i often do them from SGD -> AUD, as i get paid in SGD but i will probably be returning home one day (to retire after i've made my fortune in this lovely tax haven ), so if i get exercised and converted to AUD i'm totally fine with that. you could do the same thing from AUD -> EUR.

FX volatilities, like equity volatilities, are elevated right now, so the rates on offer are quite good. i just logged onto my DCI account and had a look at the AUD -> EUR DCIs on offer. a one week expiry ATM (EUR/AUD spot = strike = 1.4277) pays 26% pa. that is equivalent to about 72 pips. if you want a bit of a buffer you can do a one week expiry 100 pips OTM (strike = 1.4177) and get paid 13.2% pa (37 pips).

these are great interest rates, but you must weigh that up against the fact that it will not fully protect you from AUD downside. it will only protect you for 72 pips (if you did the 1 week ATM). it will also limit your AUD upside to the same 72 pips, as you will get converted at 1.4277 if EUR/AUD drops below that in a week's time. if you select the 100 pip buffer the interest is equivalent to only 37 pips, and that is how much you will be protected to the downside, but you give yourself a potential 137 pips of upside (get converted to EUR at 1.4177 plus 37 pips collected).

this is not advice or a recommendation. just something worth considering. thought i'd mention it as they've worked quite well for me.

 

[onlyann]

Thank you all for your answers.