Investors and Currency Trends
In currency as well as in stock prices, the old adage “The trend is your friend”, is very applicable. Currency risk can be planned for by examining the trends. In the chart from the last blog, the trends of the different currencies show a definite pattern in a certain direction. In one instance between the Argentine peso and the other currencies there is a huge differential. It is imperative that when using trends to make investment projections, any “blips” like this must be studied to find underlying causes.
In this particular case, the peso had been pegged to the US$; and the peg had been dropped because of an economic crisis in Argentina. Many times when there are large fluctuations of this nature a longer term trend can be examined to get a better understanding. That would not be helpful in this instance because the peso had been pegged to the dollar and the old data would only show a level relationship. In general, investors like to see the currency of the target investment country improve against their own currency. This means that the return on their investment will increase because of the currency trend. The exception might be a highly leveraged investment in which the mortgage is denominated in the target countries currency. Any negative cash flows would result in a higher cost for the investor as the deficits were covered from the home country.
A really great example of currency trends causing problems for investors is Hawaii in the ‘80s. The Japanese were able to borrow money in Japan very cheaply. They borrowed money to buy hotels in Hawaii at a very low yield and a very high loan to value ration (LTV). As the yen increased in value against the dollar and the yield from the hotels dropped, repaying the debt on the mortgages became increasingly difficult. Not only were the individual investors harmed, the entire Japanese banking system suffered. The Japanese banking system is enduring upheavals today as a result of these old problems. The next blog will deal with currency trends and retirees.
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
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