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How Australian Dollar Weakness Affects Australians

As analysts note with an unmistakable tone of surprise the breakdown of the long Australian Dollar ‘consensus trade’, many Asian investors will be wondering why this is happening.

As we see a general rotation into commodities and commodities-linked currencies, especially Australia Dollar, investors in the region could be forgiven for being puzzled by recent Australian Dollar weakness, with AUDUSD below both its 200-day moving average and the key support level of 0.7300 since the 8th of March.

Australian Dollar Flaws

Investors who have been relying on the Australian Dollar’s strength to offset significant losses in world equities will be particularly affected. Analysts at Saxo bank voiced concerns this downward move could continue, and we would see AUDUSD trade at depressed levels for some time – despite the strength of their commodity exports.

Australian Dollar Forecast

Many analysts still argue that commodities are a great way to protect yourself in this market downturn – so if the Australia Dollar is out, what other methods can investors use to access this market?

For investors in Singapore and Hong Kong looking to protect themselves by adding commodities exposure, it might be time to look at less well-known but still simple methods for diversification: ETFs. ETFs based on the wheat and mining sectors were especially strong performers in February.

ETFs have been one of the key products in unlocking the once notoriously difficult to access retail commodities market, and in the current period of market stress, they are fulfilling this role again. Investors have a wide range of ETFs to choose from, normally with clear names indicating the sector involved, and low trading and ongoing fees.

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Australian Dollar Today

If you’re still not convinced by ETFs, currencies certainly have a role to play for Asian investors interested in benefiting from the rotation away from global equities. Though the Australian Dollar is not the flavour of the month, consider looking at some of the other well-known pairs: the New Zealand dollar (NZD) and Canadian dollar (CAD) are the most obvious, but there’s also the Brazilian real (BRL) and Saudi ryal (SAR).

Normally of course this list would not be complete without the Russian rouble (RUB), but that market is becoming increasingly different to access as American sanctions bite. Finally, the South African rand (ZAR) has many of the same characteristics as the Australian Dollar – although political instability means it is less popular as a commodities play in recent years.

Why the Australian Dollar is Falling

Each of these currencies is linked to a specific commodity or group of commodities – ZAR to gold and other metals, SAR and CAD to oil, NZD and BRL to both industrial metals and agricultural products, the latter particularly in Brazil. With all of these commodity groups showing particular strength, any one of those currencies may offer a convenient means to diversify your portfolio.

By investing in the currency rather than the equity of specific producers, investors don’t need to worry about the viability and performance of resource extractors and the credit risks this entails.

On the other hand, many commodity-linked currencies are tied to developing or politically unstable nations, and one of the advantages of using ETFs instead of currency plays is they allow you to buy an asset denominated in USD or SGD which doesn’t carry the same currency risk.

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There are ETFs that track the price of physical commodities by buying short-dated futures contacts, as well as those which invest in a basket of companies involved in the extraction of a particular commodity. Both methods protect your investment from the risk of a single company going bust through poor management or adverse market conditions.

This has been a dramatic period for many Asian investors – disappointment in the recent performance of the Australian Dollar will only have added to the concerns. By understanding well what options you have to diversify your portfolio, you can better manage the ups and downs of your investing journey as they come.

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