Sunday, 2 March 2008

Exchange Rates at a Glance

If you have taken the plunge and put some of your investment portfolio into other countries through international ETFs like VPL, VWO, VGK, EFA and so on, you may already have noticed that the movement of the currency of the foreign countries has as much or more of an effect, either positive or negative, on your net home currency portfolio value as the actual market returns in that foreign country.

For Canadian investors looking abroad, the situation lately has been decidedly negative as the Canadian dollar has appreciated against every major currency around the globe. That's one major reason why my portfolio, whose structure is shown at the bottom of this blog, is down from its initial investment value of May 2007.

There is a great website called RatesFX where you can obtain a visualization of your own currency against all others. I've copied a screenshot for the Canadian dollar for the past year.

Note how the chart is almost completely blue - in other words, just about everything has gone down against the mighty CAD. Among economies of any size, only the Brazilian real has gone up. A neat feature of the live website is that when you hover your mouse cursor over the currency symbol, it shows the country and the actual percentage change so you can find out immediately that KRW stands for South Korean won and it has declined 17.54% in the last year. The other tabs show what has happened over the last day, 3 months or 3 years. In the case of the CAD, the 3 month chart shows a break in the pattern of CAD strength. The USD has still been going down but the euro and the Japanese yen have been going up, a good thing for my portfolio (e.g. a constant value of JPY buys more CAD, which is what I spend).

It is more normal that other currencies do not all move together going up or down against the CAD. Check out table 4 Comovements from the UBC Sauder School of Business (my Alma Mater of long ago!) Pacific Exchange Rate Service website, where it shows that the USD only seems to move with the GBP and the JPY about a third or less of the time. That gives me some reassurance that my portfolio will not continue to go down from currency effects but instead will gain the benefit of volatility reduction from currency diversification.

For the US investor with international holdings, the picture is quite the opposite to Canada. Everywhere the USD has been weakening (see the red chart) and portfolio gains from the currency shift will have been quite juicy.

For the UK investor the story has been mixed - strength against the USD, weakness against the euro, so the effects on a portfolio would depend on its exact makeup and proportions.

The RateFX website features a ton of other useful information, such as statistical indicators of whether a currency's volatility is increasing or decreasing - the CAD seems to be increasing and thus risk is going up - along with predictions for near future ranges of a currency's value against others.
There is an extensive list of resources and links relating to foreign exchange, including some money transfer services. The only thing it seems not to have is links to foreign currency trading sites but there are plenty of those in the Google ads on the website's sidebars.


Unknown said...

very interesting link...i have a portfolio somewhat similar to yours, but simplified (only hold 6 etfs). i am canadian and have almost 20% of my portfolio in canadian equities. i do not hedge on my foreign investments for 2 reasons...1)feel it is another means of diversification 2)i am 30 so will be holding investments for many years and suspect a time will come when the canadian charts are full of red again...suspect i may hedge to the canadian dollar when i get closer to retirement. just my 2 cents.

ps love the blog. great topics and excellent explanations.

Unknown said...

while we are on the topic...i'd be very interested in any thoughts/experiences with the best brokers for forex. with my approach to investing, keeping low fees is of great importance. the thing i found most anoying while setting up my porfolio is the huge % to exchange to both buy and sell the stock. i us interactive brokers for my non registered account and understand tradefreedom is 20 pips for both the buy and sell (rep told me this is correct, but will soon find out). understand questrade now allows to hold usd, however i just just want to buy and hold so the lowest possible rate is what is important to me. i was amazed most of the big banks charge 0.9% each way (1.8% is a big hit right off the tops). alright, my rant is done.

CanadianInvestor said...

Hi Dre32200, thanks for compliments, though you seem to be far advanced on the forex front already.

Anyhow, I'm not aware of any comparison of Canadian broekrs on the Forex issue except for some incomplete summary info at MillionDollarJourney -

Do a Google search on Norbert's Gambit and look for links to the Financial Webring where a number of savvy investors have posted about their methods for lowering their FX costs, along with comments on brokers.

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