Currency Investing Tip


Merri and I just returned from a trip to Copenhagen where I spoke at the annual Jyske Bank international investing seminar.

In Copenhagen we stayed at the Admiral Hotel which sits on the harbor and hums at night with harbor sounds, mournful seagull cries, a hawser squeaking on the docks, some ship generator grinding and clicking across the waters and harmonizing with dings and clangs from sails and rigging flapping in the oceanic evening breeze. There isn’t much air conditioning in Copenhagen and hot summer nights can be warm, but here the cool salt breeze flows in open windows and caresses the skin.

Danish beds are among the most comfortable in the world, a stiff mattress gentled with a thin down pad topped by a duvet piled on top. Somehow the sheets are the softest, Egyptian cotton I suspect, a silkiness that lulls us into those deep, sweet jet lag sleeps.

The grog however was quickly removed by the Danish breakfast, our favorite, piles of muesli and rugged coarse bread that really chews or herring in many styles. (I do ignore the piles of excellent Danish pastries despite this being their birthplace.)

More on this tomorrow, as this message has only the goal to look at one recommendation I made at the Copenhagen course when a delegate asked about the strategy of once a year (say January 1), simply moving one’s money into the safe country paying the highest rate of interest. One year later, you change to the new high-yielding safe country.

According to the delegate doing this makes money two ways… one through interest earnings, the other through foreign exchange profits. The delegate suggested that this strategy is safe and boring but highly profitable.

The delegate is correct to a degree. This can bring profits and is very easy and simple. Higher interest rates in a safe currency are likely to attract momentum that causes the currency to rise. However the tactic has some flaws, the first being that currencies do not always select January 1 to become weak or strong. Locking into a date specific speculative system for currencies moved by fundamental and market forces rubs against the grain. This is not a safe way to think. Consequently such investments are not always boring.

One should instead stay abreast currency movements and underlying fundamentals to be alert for currency shifts at any time. A recent message at http://www.garyascott.com/archives/2003/08/25/888/explained how I had been long Euros, but recently borrowed Swiss francs to reduce the risk of this as Euros (perhaps temporarily) are falling versus the dollar, but raising against the franc. Have a professional help you stay abreast of currencies the year through. Sometimes a strong currency in January becomes weak in July.

The second flaw is that selecting one strong currency is not simple. I have never felt wise enough to know which currencies will rise or fall within a year. If the choice is wrong, losses can be substantial. If you are going to speculate in currencies, using diversification and selecting several strong currencies is normally safer and can offer even more profit.

Third, diversification can be improved through loans using a multicurrency sandwich. Invest Loan at Jyske Bank for example uses the same simple idea of looking for strong currencies but enhances this idea by also looking for weak currencies. With Invest Loan profit potential is dramatically magnified.

For example the New Zealand dollar is strong right now and earns 5% interest compared to 1% for the U.S. dollar. If the NZ$ appreciates 12% in the year ahead versus the U.S. dollar, profits are 17% in U.S. dollar terms. This earns 16% more than the same amount held in U.S. dollars.

However if one borrows $40,000 more in U.S. dollars and converts these to NZ dollars, the profit potential grows to 73%.

Here is how this works. If a person converts US$10,000 into NZ dollars and borrows US$40,000 at 3% and if the NZ dollar appreciated 12% against the U.S. dollar this creates 13% interest profit and 60% foreign exchange profit.

Amount         Investment       Yield          ReturnNZ$50,000      Deposits           5%           $2,500US$40,000      U.S. dollar loan  -3%           $1,200         Total Return $1,300

This is a total interest return of 13% on the $10,000 invested. If the NZ$50,000 appreciated 12% against the U.S. dollar this would create an added $6,000 of profit or $7,300 (73%) of the $10,000 invested.

But this is a pretty high risk investment (just as only selecting the NZ dollar to appreciate is also). The recent message at http://www.garyascott.com/archives/2003/08/25/888/ suggested a more diversified and hence potentially safer portfolio. Perhaps not so "boring" either, but with more profit potential and less risk.

This portfolio takes the same US$10,000 and borrows $4,000 Japanese yen, $20,000 Swiss francs and $16,000 U.S. dollars and converts this total of $50,000 into equal amounts of Swedish, Hungarian, Icelandic and Australian currencies as below:

Amount               Investment                            Yield          Return                      $12,500        Swedish Export 2007 AA+ NZ$ Bonds            6.00%          $750$12,500        Hungarian florins Gvt. BBB 2004 Bonds        8.50%          $1,062$12,500        Iceland Gvt. BBB Bonds 2007 in ICD           6.00%          $750$12,500        Transco 2008 A AUD$ Bonds                    6.00%          $750$4,000         Japanese yen loan                           -1.63%         -$ 65$20,000        Swiss franc loan                            -1.88%         -$376$16,000        U.S. dollar loan                            -2.63%         -$420                                      Total Return  24.51% or $2,451 on $10,000

This has a total income return of 24.51% on each $10,000 invested and is a conservative investment in short term bonds that provides a nice diversification of currencies. Plus if there is currency appreciation this would be additional profit.

If you are interested in speculating in currencies leveraged or not may I recommend my free course International Currencies Made EZ available on line. Simply go to http://www.garyascott.com/currez/

Join us in November with Thomas Fischer of Jyske Bank to learn more about Invest Loan and choosing currencies plus many other aspects of global economics and investing. For details go to http://www.garyascott.com/courses/bldh.html

Until then, may all your investing be good.

Gary


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