An article I wrote Monday, the second in a series covering Michael Dever’s new book “Jackass Investing,” looked at commodities and a carry trade using the PowerShares DB G10 Currency Harvest (DBV) as a way for individual investors to benefit from the carry trade. As I did my research for the article, I became increasingly interested in the outlook for some of the more actively traded currencies and how investors could benefit from differing economic environments across the globe.
As I wrote in the previous article, currencies fluctuate due to relative economic strength, expectations for inflation, and interest rate differentials across the countries. Higher interest rates, the primary way a central bank slows inflation in an overheating economy, draws capital inflows from foreign investors looking for a better return. There are a few no-arbitrage intricacies, but that is the general idea behind currency movements. There are quite a few ways to invest in currencies, most do it for hedging purposes but there are also those who use it for return as well. Hedging operations are conducted primarily by companies with cross border revenues or investors with foreign investment exposure. The strategies for hedging are fairly straight-forward, the most popular by far is using futures to remove your foreign currency exposure. As an owner of Colombian real estate, I use futures when I want to lock in a good price for the peso and stabilize my revenues from rents.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.