Protecting against increasingly strong US Dollar?

[OnTheGo]

Has any of you with substantial savings been buying US Dollars (or options to buy), due to ever weakening currencies compared to the USD? We are all cashed up, mostly in AUD (and some in EUR).

Currently, 1 AUD buys only 0.76 USD. Not all that long ago you would be getting 0.90 and we could even experience parity and beyond! We could've...should've...

I've been reading a lot lately about the markets and analysis, and I am seriously considering protecting our cash savings from a declining AUD against the USD.

However, I am reluctant to take a huge gamble and lock our money into a no-interest bearing USD account.
I have read about FX Options and how we could lock in a future conversion (strike rate) for a premium, like an insurance, whereby we would buy the right but have no obligation to sell our AUD at that future date (so if the market rate is better than expected, we would then obviously not exercise our right).

Has anybody done this before? I don't have any experience and I am not sure whether this is a good idea or not, but it can [help making / prevent losing] a lot of money, but it also seems to cost quite a bit.

I've looked at http://www.ozforex.com.au/ but have not contacted them yet.

Feel free to add your comments

 

[SusieQQQ]

I don't know what AUD options pricing is at the moment but in general I would expect the cost of an option to exceed any interest you may forgo by moving from AUD into USD.

Also, if you are definitely moving to the US then shifting your cash into USD - at least as far as you know you will have USD commitments - is not a "gamble" at all but the conservative thing to do. What you would be doing otherwise, is gambling that the AUD will get stronger...

 

[OnTheGo]

I don't know what AUD options pricing is at the moment but in general I would expect the cost of an option to exceed any interest you may forgo by moving from AUD into USD.

Also, if you are definitely moving to the US then shifting your cash into USD - at least as far as you know you will have USD commitments - is not a "gamble" at all but the conservative thing to do. What you would be doing otherwise, is gambling that the AUD will get stronger...

No, not quite. You are forgetting the time factor, Susie. I'm not talking about a few bucks to preserve extra pocket money, either.
I'll illustrate by real numbers:
Say I have AU$300,000 today. At 0.75 it would give me US$225,000 if I exchanged this today.
I am making an assumption that the AUD will in fact weaken further against the USD.
If it falls to 0,65 at some point*, it would only give me US$195,000 then.
At 0.60, just $180,000.
Say I find it too risky to be sitting on the sidelines and lose US$45,000 over the course of ... *say 10 months (by Feb 2016).
On the other hand, I don't want to be tying my money up by placing it in a no-interest bearing USD account, nor should I be putting all my money into the stock market, let alone the US exclusively (USD denomination).
To 'secure' the option of exchanging at 0.75 to the AUD might cost me around $10,000 AUD (example), yet it would save me from losing more than 4 times that amount by the end of that period. If the AUD tanks even further, this will have saved me from losing even more.
Should the AUD have the same exchange rate to the USD in 10 months as it is today, then yes, I would have lost $10k (in premium).
That equals 3% of the principal. By not tying up the $300k, I have complete freedom to invest it, even across different currency jurisdictions (i.e. share markets), in the meantime and actually make back (more than) what the Future Option would cost me.
At this point we don't know if we will be given another chance to move to the US (let's hope so), but this would at least make it possible to preserve the falling value of the AUD in the meantime without committing to an actual exchange now. So even if we were not selected, we could benefit on the same basis of this deal.

Hoping to also hear from those who have some experience with this ... but I should perhaps post in another forum. I posted it here as I think it's important to anyone hoping to immigrate to the US, at least to those with savings.

 

[Sloner]

In Russia the exchange rate of 1 US dollar equals 50 rubles. Many people keep their savings in the 3 or 2 currencies. Ruble, dollar, euro, or other strong currency. In one pile diminish, another increase. It's simple.

 

[OnTheGo]

In Russia the exchange rate of 1 US dollar equals 50 rubles. Many people keep their savings in the 3 or 2 currencies. Ruble, dollar, euro, or other strong currency. In one pile diminish, another increase. It's simple.

Not exactly but I get your point. Spreading across multiple currencies is one way to diversify. However, currently it looks like all major currencies are declining against the USD, not against each other.

 

[EmilyW]

From what I have read, the AUD should pick up by the end of this year and is predicted to get back to parity end of next year.

We are keeping our cash here in Oz until it picks up and only exchanging large amount when it is advantageous to do so / we have no other options.

We are investing it whilst it is here so it is not dormant and it's still 'working' for us.

 

[OnTheGo]

I REALLY want to read what you have read! Can you please give me some links?
As everything I have read points to the exact opposite which makes partial sense to me when looking at the underlying reasons.

From what I have read, the AUD should pick up by the end of this year and is predicted to get back to parity end of next year.

We are keeping our cash here in Oz until it picks up and only exchanging large amount when it is advantageous to do so / we have no other options.

We are investing it whilst it is here so it is not dormant and it's still 'working' for us.

 

[EmilyW]

Honestly, can't recall the articles, but it was around the time the dollar rallied briefly in February 2015.

I guess it depends on what you read as to what conclusions you come to.

We are trying to offset the damage by investing wisely.

 

[SusieQQQ]

You'll get as many different currency forecasts as you will get economists who forecast them. I wouldn't be making any big decisions based on anyone's currency forecast...no matter how smart they are.

OTG, just think again about what you said. I'm not sure what your timelines are, but being 'free to invest' in a number of different stock markets does not necessarily protect you, especially if you're not investing on a long term horizon. Yeah, maybe in 6 months you'll have made back the cost of the option. But stock markets are volatile and tend to be correlated, so you need to be able to ride out the corrections. If everything tanks together in 6 months you'll be screwed if you need to realise the funds then. If you don't then it doesn't matter of course as you can ride out the fluctuations.

There are also many options between a non-interest bearing account and the stock market....I'm not sure why you seem to think those two extremes are your only options.

Re diversification: it's a great idea in principle. For currencies, less great in practice. When the dollar is strong, most other currencies weaken. There is only so much you can diversify, though the swiss national bank having given up the fight helps a bit (no interest rate return there of course either), euro everyone knows its woes, and emerging markets getting as whacked as Australia by commodity prices. The currencies that give you better interest rate returns are the ones that are vulnerable. This is just how it works. You can look for volatility-adjusted returns to try guide you a bit more, as there are always the one or two currencies where interest rates more than offset depreciation, but that only tells you what happened in the past.

 

[OnTheGo]

Yeah, @SusieQQQ I don't disagree with you on most points
I guess we are at a cross roads currently...we've been cashed up for some time, after getting out of property in Australia (it is insanely overprized) and the savings interest return was good overall from the time we got out until some time last year. Now interest rates are diminishing, as well as the AUD to USD value, which prompted me to finally look at ways to preserve (and increase) the savings. The desire to be moving to the US obviously plays a fair part in my thought process. Of course, we could also simply be looking at investing into all sorts of things and use any gains to offset any potential losses on a future AUD to USD conversion. The reason why I came up with FX options was simply because it seems more like an insurance policy against the worst case scenario....and I still remember very well when the Aussie Dollar was only worth .50 US cents (2001). Given the mainly commodity-driven Australian economy (as you rightly point out), it is not too far fetched to think that it could arrive back at that conversion rate in a years time. We don't consider ourselves rich, but it would be a shame not to be able to pay for a house in cash in the US (should we get the second chance to move there), just because we watched our savings in AUD diminish in USD terms.

Out of interest, what other investment vehicles can you think of?

 

[connectedspace]

I got all my money out of Australia as soon as I could. You could say I'm bearish on the nation's outlook

I went crazy long and moved it all into USD, as that's the only major currency backed by an improving economy at the moment. As for what I moved it into: a mixture of real estate (investment condo), cash, bonds and ETFs. (Vanguard is the boss.) I'm in no way qualified to trade stocks, but I figured I could wait out a tumble in the S&P500.

I have subsistence savings left here in Australia to cover emergencies, plus the dreadfully over-priced superannuation savings we're forced to hold.

That decision is already paying off big time. I'm earning returns in USD, which appreciate vs the AUD and EUR by the day. Even if I never get out of Australia, I've made the right financial decision in the short term. I'd say there's a good chance it'll remain the right position for over a decade: I anticipate the AUD will bottom below 0.50 before it starts to improve again. It's a long slow decline with occasional breathtaking drops.

I answer to your question about currency options, they look way too complicated for this bear of little brain. Could be the right thing to do, though!

Hope that helped.

 

[OnTheGo]

I got all my money out of Australia as soon as I could. You could say I'm bearish on the nation's outlook

I went crazy long and moved it all into USD, as that's the only major currency backed by an improving economy at the moment. As for what I moved it into: a mixture of real estate (investment condo), cash, bonds and ETFs. (Vanguard is the boss.) I'm in no way qualified to trade stocks, but I figured I could wait out a tumble in the S&P500.

Hey, thanks for your input. I never heard of ETFs before...just had a look but don't quite grasp the concept yet (compared to index funds, i.e. not sure about the being traded like shares part).

So you are also still based in AU...and bought a condo in the US...put cash into a US dollar account (in the US, I presume) and invested in US bonds, leaving the Vanguard ETF the only major AU based investment? The latter is priced in AUD, though isn't it?

Someone please pass me a crystal ball ...

 

[Alien2010]

@OnTheGo:
Unfortunately I cannot foresee the fx market movements, as evidenced by the lack of my private islands. So, I cannot help you there.
Since you are writing in this forum, I am assuming you already are, or about to become, a US taxpayer, in which case you have to take tax implications into consideration.
First, there is the foreign asset disclosure. Then, you have to figure out what to do with capital gains. Say, you have 100K in currency X and during the year this magical currency doubles in value against the USD, now you have twice as many USDs as you used to have (at least theoretically, since you have not converted X to USD yet). Would this be a tax liability? In case of non-equity options that was the case: if at the end of the year your instruments were in the money, even though you have not realized the gain by closing the position or due to maturity, that gain was a liability.
US Tax Code is very complicated and my 2 cents would be to learn the tax implications of any position you may wish to take.

 

[OnTheGo]

Thanks Alien, neither my wife nor I are US taxpayers nor US persons as per IRS definition as of yet. We are hoping that we will be selected again in the upcoming DV draw (had to abandon the process last year unfortunately). We therefore have no added worries with regard to US taxes. We simply have high cash savings and are looking for ways to preserve (or increase) that, especially considering the global currency shifts that are taking place and our plans of moving overseas again in the not too distant future (be it the US or EU, or elsewhere). This is not directly related to moving to the US, since we cannot assume that we will be given the chance, but I am more biased towards the US economy picking up than I am towards the Australian economy for obvious reasons. The EU is another story altogether. So rather than limiting myself to buying into USD denominated investments, in order to convert parts of our savings to USD today, I thought it would be a good idea to consider buying a currency option instead, like an insurance to "lock in" a predetermined future AUD/USD conversion, which would then still allow me to invest the money however I like in the meantime. The added benefit would be, should the market rate be better on the date of maturity, I could simply not exercise my right. If the AUD/USD conversion tanked to .50 US cents in say a year's time, we would have lost a lot of money by staying invested as we are currently: cash AUD.

@OnTheGo
Unfortunately I cannot foresee the fx market movements, as evidenced by the lack of my private islands. So, I cannot help you there.
Since you are writing in this forum, I am assuming you already are, or about to become, a US taxpayer, in which case you have to take tax implications into consideration.
First, there is the foreign asset disclosure. Then, you have to figure out what to do with capital gains. Say, you have 100K in currency X and during the year this magical currency doubles in value against the USD, now you have twice as many USDs as you used to have (at least theoretically, since you have not converted X to USD yet). Would this be a tax liability? In case of non-equity options that was the case: if at the end of the year your instruments were in the money, even though you have not realized the gain by closing the position or due to maturity, that gain was a liability.
US Tax Code is very complicated and my 2 cents would be to learn the tax implications of any position you may wish to take.

 

[SusieQQQ]

Yeah, @SusieQQQ I don't disagree with you on most points
I guess we are at a cross roads currently...we've been cashed up for some time, after getting out of property in Australia (it is insanely overprized) and the savings interest return was good overall from the time we got out until some time last year. Now interest rates are diminishing, as well as the AUD to USD value, which prompted me to finally look at ways to preserve (and increase) the savings. The desire to be moving to the US obviously plays a fair part in my thought process. Of course, we could also simply be looking at investing into all sorts of things and use any gains to offset any potential losses on a future AUD to USD conversion. The reason why I came up with FX options was simply because it seems more like an insurance policy against the worst case scenario....and I still remember very well when the Aussie Dollar was only worth .50 US cents (2001). Given the mainly commodity-driven Australian economy (as you rightly point out), it is not too far fetched to think that it could arrive back at that conversion rate in a years time. We don't consider ourselves rich, but it would be a shame not to be able to pay for a house in cash in the US (should we get the second chance to move there), just because we watched our savings in AUD diminish in USD terms.

Out of interest, what other investment vehicles can you think of?

Options are exactly an insurance policy, and like an insurance policy you need to be prepared to accept that the premium you've paid might just end up being a sunk cost.

There are a huge range of mutual funds you can look at that give you various levels of return at various levels of risk.

ETFs are pretty much the same as index funds if you're talking equities. Commodity ETFs can be tricky as they often underperform actual commodity prices. But I'm guessing there's no interest in those right now

I went crazy long and moved it all into USD, as that's the only major currency backed by an improving economy at the moment. As for what I moved it into: a mixture of real estate (investment condo), cash, bonds and ETFs. (Vanguard is the boss.) I'm in no way qualified to trade stocks, but I figured I could wait out a tumble in the S&P500.

It's a nice 'typical' diversified mix you have there ...REITs are an alternative to physical property of course.

Yeah although I just left my money in cash, I moved out as much as I could (exchange control) from a country that's had similar currency moves to the AUD, as soon as we got our visas... My interest return has indeed been paltry, but I've avoided a +- 40% currency loss on those funds so definitely was the right move. Pity I couldn't take everything out at that stage.