Australian Dollar: Is It Worth Buying?

| May 19, 2011 | 0 Comments

Most investors stick with the “big four” asset classes for their investment portfolios.  Ask anyone what they’re investing in and they’ll likely say stocks, bonds, commodities, real estate, or some combination.

But there’s another option for investors… and the benefits are too plentiful to ignore.

What I’m talking about is investing in currencies.

Currency investing (and trading) has taken off in recent years. The currency market is huge.  In fact, roughly $4 trillion worth of currencies change hands every day.  It’s easily the largest financial market in the world.

What’s more, currencies allow an investor to play the global market.  Want to invest in the economy of the United Kingdom? How about New Zealand?  Currencies make global investing as straightforward as possible.

Why?  Under normal circumstances, a currency reflects the economic condition of a country.  Think Switzerland’s GDP number will be better than expected?  Simply go long the Swiss Franc.  It doesn’t get any easier than that.

Or does it?

As a matter of fact, it’s now easier than ever to invest in currencies.

The growing popularity of currency ETFs make buying (or selling) a currency as simple as trading a stock.  Here’s why…

There are ETFs available for every major currency.  You can invest in the Euro, Yen, Swiss Franc, Pound, Peso, etc.  There are even ETFs for less popular currencies such as the Russian Ruble or Swedish Krona.  And many of these ETFs even offer dividends!

Sounds like these ETFs would be a nice addition to any investor’s portfolio.

But… how do you know what currency to pick?

Is it any easier forecasting the economy of New Zealand than say, deciphering a company’s financial statements?  How do we know if the Yen is a better investment than the Swiss Franc?

Fortunately, you don’t have to be an expert on global economics to have reasons to invest in currencies.  In fact, there’s even a better reason to put money in currencies than global diversification.

That reason is correlation.

Here’s the deal…

Some currencies correlate extremely closely with other major asset classes, such as stocks, gold, and oil.  In other words, certain currencies do an excellent job of tracking some of the world’s most important investment products.

And right now correlation makes the Australian Dollar an amazing investment opportunity.

You see, the Aussie Dollar is the most highly correlated currency to several important investment classes.  As a matter of fact, the Dow Jones Industrial Average, S&P 500, gold, and oil are all being closely tracked by the Aussie Dollar.

Take a look at these numbers, which I’ll explain in a moment…

  • Dow Jones… 0.87
  • S&P 500… 0.87
  • Gold… 0.77
  • Oil… 0.76

These numbers represent the Aussie Dollar’s correlation with the four major investment products listed.  Remember, the closer a correlation is to 1, the more alike the investments are.  So, two investments with a correlation of 1 would move exactly the same.

Look at the list again.  Every category has a correlation of at least 0.76… all the way up to 0.87.  Make no mistake… these numbers are significant.

Here’s why…

The Aussie Dollar can serve as a proxy for all four investments.

Let me put it a different way.  To have exposure to gold, oil, the Dow Jones, and the S&P 500, all you have to do is buy the Aussie Dollar!  It tracks those four so closely, there’s almost no reason to buy them individually.

Who would’ve guessed it?

Now, correlations do change over time, so it’s something you’ll want to keep an eye on.  But at this point in time, there’s no better currency to buy in terms of key correlations than the Aussie Dollar.

And, buying the Aussie Dollar is a piece of cake.  Simply purchase the CurrencyShares Australian Dollar Trust (FXA).  It even pays a dividend yield of over 3%.

DDon’t miss out on your chance to trade the Aussie Dollar while it’s highly correlated with stocks, gold, and oil.  There’s no easier way to track those important asset classes all in one investment.

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Category: Currency Trading

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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