Opinion: Canstar’s General Manager of Wealth, Josh Callaghan
The Aussie dollar has been on a downward march since the end of January when it broke through the 80-cent mark against the US dollar. Recently, it broke below the 71-cent mark which prompted me to write this quick note.
The affects of exchange rates
Let’s take a look at some examples to see what impact exchange rates have. First though, it’s worth noting that in the example I’m using the market quoted exchange rate, which is not necessarily what investors receive when they convert money between currencies. Also, I haven’t considered any costs such as brokerage or exchange spreads.
As they’re among the most popular US investments for Australian investors, let’s consider the FANG (Facebook, Amazon, Netflix and Google) stocks from February to now.
|Stock||Share Price Return||Currency Return||Total Return|
Purchased on 1/2/2018 at close price with AUD/USD rate of 80c, sold on 11/09/2018 at close price with AUD/USD rate of 71c. Prepared by Canstar. Source Google Finance.
As shown, the change in the Aussie dollar has had a material impact on these stocks in different ways. Since February, Facebook stocks have been under fire on a number of fronts, but most notably was the Cambridge Analytica data breach scandal that sent their shares tumbling. Compounded with softening user numbers, this sort of event may be enough for an investor to change their long-term view of the company and want to exit. In the above example, local investors may get out of their position for just a little over 3% loss rather than the 14.5% loss which the actual stock has taken on.
In the case of Amazon and Netflix, the exchange rate move has worked to boost their already impressive share price run this year. It may mean that Aussie investors are able to take some of that value off the table while the currency exchange is favourable.
Side note: I’m a big fan of locking in profits where I can.
In the case of Google, whose share price has gone almost nowhere in that time, it gives investors the opportunity to sell down and take almost 12% in profits.
The bottom line
As you can see, the exchange rate impact on international holdings can change the dynamics of when to buy/sell and when to convert that money back into Aussie dollars. If you’re investing overseas for the short term, then considering the direction of the dollar is essential. It’s no different for long-term investors, however there’s a little more time to absorb the ups and downs.
Of course, there are ways of hedging out the impact of exchange rate movements, but I’ll leave that topic for another day.
About Josh Callaghan
Canstar’s General Manager for Wealth, Josh Callaghan, has accumulated more than 15 years’ experience in banking and finance, with in-depth product knowledge across retail banking, stockbroking, life insurance, health insurance and superannuation. Josh’s experience combined with his passion for new technology and active role in the fintech community has positioned him as a credible thought-leader on the future of finance. Through his work at Canstar, Josh is striving towards a goal of creating a world where building and managing wealth is easy for all consumers.