Forum Topics Rising AUD
Rapstar
Added 2 months ago

Traditionally, AUD rises in periods of positive global economic growth. However, since the GFC, there has been a shortage of USD in world trade, aka the "Milkshake Theory". Refer to the $DXY long term chart below. The question is, are we entering a new era, where USD currency debasement, erosion of US Fed independence, deglobalisation, transition to a multi-polar world, will see the demise in USD currency hegemony? Likely - When that bottom red trend line is breached, that will mark the end of the milkshake regime. Mind you, a weak USD is bullish for the NASDAQ 100, where 40-50% of earnings are non-USD denominated. 17fc619c5893547637a2e30118aed752cdb949.png

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Jarrahman
Added 2 months ago

I’m keen to hear how others think about currency movements, particularly the AUD relative to the USD, and how much it influences your allocation decisions.

My current thesis is that the AUD is likely to strengthen against the USD over the next year or so, and that this could be a meaningful headwind for Australian investors holding unhedged US assets. On that basis, I’m considering whether it makes sense to gradually reduce my USD index exposure now and reallocate more towards AUD index assets.

Do you adjust positioning based on currency cycles? Or is the view that trying to anticipate forex moves is a distraction from long-term compounding, and best ignored?

I appreciate that timing currencies is notoriously difficult, but at the same time the AUD/USD cycle can have a material impact on realised returns over multi-year periods. Curious how others think about this trade-off and whether currency views ever influence asset allocation decisions.

I could be overthinking it. I know there's not the same businesses in Australia that there are in the US and the business performance could also be skewed considerably.

Not looking for short-term trading ideas, more interested in how people frame this from a long-term, philosophy perspective.

Keen to hear others’ views and experiences.

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Lewis
Added 2 months ago

I like Scott Phillip's view on this. Might be misremembering a bit but the gist is, AUD to USD likely spends a lot of time hovering 5-15% either side of the average for most of the time. In these times ignore it, it may go up or down but probably not by much. If you're a long term investor it probably doesn't move the needle and if it does it's a coin flip as to which direction. However, when it swings to one extreme or another it can be a consideration, but shouldn't necessarily be a decision driver.



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Solvetheriddle
Added 2 months ago

@Jarrahman i have about 40% of my equity exposure o/s, all unhedged, so i do think about this. i calculate that every 1c move higher in the $A is about 0.5% performance drag. i can then think about how much that impacts my expected returns, which are >10% pa. A bear scenario is a 10% move higher in the $A would then wipe out about half of one year's advancements in value. Do I consider that a risk i am willing to take?--for me, yes. you can do your own calculations.

a relevant question i have is, can i forecast the FX rate? fx is the most difficult asset class to forecast, harder than equities and bonds, over the LT and ST, imo. so it's a case of this could happen, lower probabilities or who knows.

fx risk does sharpen my international investing, i want attractive long-duration stories that are not available in Oz. That helps counter the fx risk.

another issue to consider is that both the $a and equity markets are usually risk-on trades. that means when you want to sell the $A, the equity markets are usually very strong. so you are unlikely to get the free kick trade of a high $a and low Dowjones, for example. so that's a shame, but reality.

in summary, i am aware of the fx risks and have tried to quantify them. Secondly, my international investments are targeted to, imo, very attractive entry levels, in areas that can't be replicated domestically and are LT, so i can wait out adverse st moves.

That's about it


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