Investment Opportunities When Currencies Fluctuate: Taking Advantage of FX Volatility

Transcription

1

2 Investment Opportunities When Currencies Fluctuate: Taking Advantage of FX Volatility Shaun Osborne, TD Securities

3 AGENDA What drives currency markets? What is the outlook for the USD, CAD Appreciation of FX trends can help boost returns, protect against adverse moves FX outlook, how this relates to investing, how Canadian-based investors can take advantage Strategies

4 FX Outlook

5 FX Outlook

6 FX Outlook

7 FX Outlook

8 FX Outlook

9 FX Outlook

10 FX Risk & Exposure Buying an international investment introduces additional risk via the exchange rate During a period where the foreign currency appreciates, investment returns in the home currency increase During a period where the foreign currency depreciates, investment returns in the home currency decrease

11 FX Risk & Exposure Investor buys Japanese stocks Investor is exposed to JPY Investor s returns are boosted if the JPY strengthens Investor s returns are undermined if the JPY weakens

12 FX Risk & Exposure Investor buys Japanese stocks Investor sells 110CAD/buys JPY (JPY90.00) to buy 10 ABC Corp JPY1000 Three months later ABC Corp stock JPY1100 (+10%) Buy CAD/sell JPY (CAD +15%) Liquidation 10 * 1100 / = CAD106

13 FX Risk & Exposure Investor buys Japanese stocks Investor sells 110 CAD/buys JPY (JPY90.00) to buy 10 ABC Corp JPY1000 Buys CAD/sells JPY 3 m Three months later ABC Corp stock JPY1100 (+10%) Buy CAD/sell JPY Liquidation (10 * 1100) / = CAD122

14 Hedging Hedging is relatively cheap for institutional investors Most international mutual funds don t hedge FX, some only hedge part of the exposure Those that do hedge want to take FX right out of the equation

15 Hedging Individual investors can seek out investment funds that hedge FX exposure or funds that speculate in currencies directly Individual investors can utilize currency ETFs to express a view on currencies Investors can select Canadian corporations that generate a large proportion of earnings overseas

16 Hedging Corporations with large overseas operations will generate more profits if home currency depreciates Corporations with large overseas operations will generate less profits if home currency appreciates

17 Taking Advantage How do investors profit from TD s outlook for a stronger USD? Buy assets in appreciating currency (US-based hard assets, USD-denominated or unhedged ETFs) Buy Canadian stocks with large US earnings Avoid commodities/commodity producers (higher USD = lower commodity prices generally)

18 Taking Advantage What if you disagree? Hedge FX (USD) risk Buy hedged ETFs Stick with mainly domestic (CAD-denominated) investments

19 SUMMATION Currency markets are volatile mean reversion holds but only over the very long run Foreign exposures increases diversification but can increases risk (FX) There are simples ways to protect against adverse FX movements or profit from favourable ones

20 KNOWLEDGE BUREAU Knowledge Bureau is a national educational institute and publisher focused on excellence in financial education. Our mission is to provide professionals and their clients the knowledge and skills to make sound financial decisions in our world class virtual campus.

21 Thank You For more information: Please call or Visit