Currency Exchange Traded Funds (ETF's) have hit Australia's shores thanks to a new product by Betashares. Buying and selling these currency funds is the same as trading equities on the ASX.
So why should you consider trading in currencies?
The most compelling reason is the ability to diversify. Diversification is all about choosing assets that move differently and currency trading allows you to diversify across asset classes.
The currency market is the largest and most liquid market in the world. The Australian dollar/US dollar cross is the fourth most traded currency pair.
If you're thinking about diversification, it's important to consider how your assets work together to create a high performing, total portfolio. That's where correlation needs to be considered.
Correlation measures how an asset performs when compared with another asset.
You can have correlation ranging from a reading of -1 through to +1. If you have two assets that have a correlation reading of -1, that means those assets are perfectly negatively correlated — that is, those two assets move in opposite directions. And if your assets read at +1, they are perfectly positively correlated — that is, those two assets move in the same direction.
Below is a table of the Australian sharemarket versus the Aussie dollar/US dollar cross over the last ten years:
In this table you can see that the Australian sharemarket and AUDUSD has an average correlation over the last 10 years of +0.5. So while they aren't perfectly correlated, they do tend to move together, although not strongly. In fact, +0.5 means that quarter of the movement can be attributed due to the other asset.
The new Betashares currency ETF code is USD. When you buy the fund, what you're doing is buying a unit of 10 US dollars expressed in Aussie dollars (less management fee).
All you have to do is put the trade through your broker (like Bell Direct) as you would when you normally buy or sell shares.
So how do you know when the time is right to dive in? As always, I like to combine different trading tools like charting and looking at macro events.
It's difficult to chart the currency ETF, but the value is derived from the underlying currency pair USD/AUD (US dollar to Aussie dollar), so use your charting tools to track its performance that way.
Here is the chart for USDAUD.fx over the last two years.
You can see that over the last two years the US dollar has weakened and the Aussie dollar has strengthened. Right now there is a key support level at 98.4 Australian cents. If this level is broken, there could be more downside for this pair.
Some traders will trade currency off the back of economic data. Generally data which shows strength in an economy is bullish for that currency as it can signal potential rate rises. Expectations for rate rises are generally good for a currency because it means that the yield for that currency will be rising.
For example, you can review a calendar of upcoming economic data from sources like dailyfx.com (below is an example from the week commencing 7 February).
ETFs are growing in popularity in Australia and you can now trade the following:
With currency being added to that list, investors and traders now have more options. As always, consider these investments in light of your own circumstances and if needed seek professional advice.
Happy trading!
Julia Lee Equities Analyst Bell Direct Have you started trading with Bell Direct for just $15 a trade? Register now for free.