How does currency affect my investments

Investors who have monies invested offshore have an additional risk which is currency. Currency can magnify gains or losses on the assets themselves. Sometimes the movement of the currency ends up being more important than the performance of the asset. It is possible to eliminate currency risk by taking out a currency hedge. This is a financial instrument that guarantees that an investor can change foreign money for a certain rate in the future. The problem is that the cost of such hedges can be quite expensive and difficult to manage for private investors.

While currencies can be quite volatile over the short term the long term trends of currencies is more open to fundamental analysis. Two key drivers of a countries currency are interest rates and GDP growth. If both of these are increasing there will be a greater demand for that countries currency and conversley if these are failing the currency will soften. At present NZ’s dollar is strong against other currencies due to our solid economy and relatively high interest rates. While our dollar is likely to remain high over the next 12 months pressure is building for further declines after that.

For your information currency hedging is used across your AMP Super and Kiwisaver funds. This has the effect of smoothing returns.