Everybody should cut this out. Today ST Sun May 4 2008 ( Invest Page 19) has a lead article on Foreign Currency investment. The areas examined are
(a) Buy low, Sell high ie trading foreigh currencies
(b) Carry Trade
(c) Invest in high yielding currencies like Aussie and Kiwi
The ST report relates mainly to physical currency converted from SGD. It is what most layman would do when they think of foreign currency. But this is an inefficient and costly way to address to opportunities in the currency world.
You should be thinking about forex which is a leveraged and derivative of the underlying foreign currency. The confusion is because they share very similar name. You can do everything you want to with physical currencies much more efficiently with forex.
(a) This is a no brainer. It’s just directional trades with forex
(b) It doesn’t really make much sense to do simple carry trade in both physical and derivative. The underlying volatility of currencies will make the carry trade irrelevant. In the end the cross rate between the currency will dominate and decide the P&L in the trade most of the time.
(c) Long the physical and hedge with the derivative. Eg buy the KIWI currency for the near 9% interest rates for long term. Dynamically Value Hedge (DVH) the KIWI and USD forex. The likelyhood is that you will make three ways – capital gains on the KIWI, interest income and DVH profit.
Compare to the conventional method. If you just long the physical KIWI, whatever you make on the interest rates you may lose back on the KIWI to SGD conversion given the strength of SGD. You don’t have the benefit of any profits from DVH.