The Aussie dollar continues to hover at an elevated position relative to most major currencies. It is being buoyed by resurgent strength in the resources sector, support we believe will likely fall away beyond the near-term. In our view, the AUD is particularly vulnerable against the US dollar, given steadily rising US interest rates and higher inflation should naturally lead to relative USD currency strength. This is a theme we believe will play out over the next six to twelve months and continue over a number of years, leaving Australia with a more competitive currency and greater flexibility over our own monetary policy decisions.
For investors with a similar view on the AUD, the cleanest way to gain exposure to a falling currency has historically been holding foreign cash through a multi-currency bank account. This can be done relatively simply but it is not instant, incurs various costs and is often expensive to maintain. For individual investors, we believe there is a simpler, more efficient way – via ASX-listed exchange traded funds (ETF’s).
Betashares’ US Dollar ETF (ASX:USD), Euro ETF (ASX:EUR) and British Pound ETF (ASX:POU) strike us as a better proposition for DIY investors. Their annual management fees of 0.45% are less than the total annual costs of a multi-currency or foreign bank account, they can be traded instantly on the ASX and with near limitless liquidity and they offer superior transparency. The return profile of these ETF’s precisely mirrors that of a cash return (before fees), including cash interest. Granted, the income profile of most major currencies is currently next to nothing but even in this regard we have found the ETF’s to offer slightly better income. Of course, differences at this level are largely immaterial but it is important to know these ETF’s do effectively pass on the interest to investors.
Currency ETF’s are traded as normal shares and can be easily used to fulfil a variety of purposes ranging from opportunistic trading based on unusual volatility to longer-term macro-based or thematic investing. Equally importantly, these currency ETFs can be used strategically as a hedging tool against the Australian economy or to simply diversify the profile of an investment portfolio. Like foreign cash, the uses are varied and can form yet another pillar of a well-constructed portfolio. We believe currency ETF’s are a better option for individual investors, and at a time of elevated AUD strength, may be worth consideration.

Figure 1. USD ETF tracking vs. USD/AUD
Source: Clime & Thomson Reuters