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Investment Opportunities In The World Currency Market
Editor’s note: The following piece is an advertorial.
It is my turn again to share some thoughts with all of you faithful readers of the Daily Pfennig® newsletter and, as is typical, I sat down to the computer staring at a blank screen wondering just what I would write about. What can I write that has not already been discussed by Chuck in his daily writings? The answer came from my daughter Lauren, who walked by and asked a fairly simple question: “What are you up to?” When I told her I was writing a piece for work, she followed it up with another good question: “Just what do you do at work”
That got me thinking about what we do at EverBank World Markets, a division of EverBank. Our vision reads as follows: “We provide unique global investment solutions that enable investors to efficiently diversify their portfolios.” The core of these global investment solutions is our WorldCurrency® deposit accounts and non-FDIC insured metals accounts. So, for this Sunday’s piece, I have decided to share more information on the currency market and give you a quick look at some of the products we offer.
The Currency Market
Forex is the largest trading market in the world and the most liquid by far; $3 trillion is traded each day in the currency market.1 That’s more than all of the world’s stock markets combined when you consider that only $99.75 trillion was traded in all of 2015.2 It trades 24 hours a day, six days a week, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. As you can see, that adds up to a lot of activity.
In this trading world, you’re essentially investing in money itself – not stocks or bonds. As such, you need never be concerned about a particular company announcing an earnings surprise, or a particular industry being beset by losses. Even a global recession won’t diminish the profit opportunities of all currencies.
When you’re trading currencies, you’re exchanging one form of money for another. You’re selling one currency against another. No matter how dismal things might get for the stock market, no matter how perilous the bond market, and no matter what happens to real estate, the currency market can consistently offer you potential profit opportunities that extend beyond stocks, bonds, real estate or any other type of investment.
The Eternal Bull Market: Forex
Forex can be compared to a playground seesaw; when one currency is going down, another has to be going up. So, there are always currencies going up. Equally important is the fact that currencies can tend to reflect global fundamentals and, therefore, can oftentimes move independently from stocks and bonds. For the average investor, that means currencies could be a great asset class for diversification.
Some Background On the Foreign Exchange Currency Market
|•||Currencies have tended to trend better – and more often – than other asset markets. That is because traders in the currency markets are led by price action and price action often reflects economic fundamentals. This trending aspect of currencies in the medium- and long-term can potentially create excellent opportunities for traders and investors.|
|•||No one individual or country can corner the market. Because the world of Forex trading is so large and has so many participants, investors have little to worry about regarding insider trading, or plays that could “corner the market.”|
|•||No across-the-board crash. In contrast to stocks, bonds and commodities, it is nearly impossible for all currencies to be crashing at the same time. Individual currencies can certainly fail and surge against other currencies. Since the depreciation of one currency is automatically linked to the appreciation of another, a crash affecting the entire market is highly improbable.|
|•||It truly is the last bastion of pure capitalism. There is no physical exchange, nor is there any regulatory body that controls the spot currency market. It is a market driven purely by supply and demand. Prices are set in a purely competitive environment among the major money center banks on every continent around the world. You have the power to make money regardless of the credit crisis and regardless of whether stocks, bonds or the U.S. dollar are sinking or soaring.|
|•||There is now great diversity of investment instruments: Financial instruments are the way you can trade in the market; in the Forex market, they include CDs, ETFs, options, cash forex, futures, etc. All of these instruments are now available to individual investors to make it much easier to invest in currencies. This wasn’t always the case. In fact, in the past, it was very difficult for individual investors to add currencies to their portfolios.|
Foreign currencies are a unique asset class that can help one achieve a number of financial goals, but it’s up to you to weigh the risk with the rewards. Loss of principal is possible with all of our currency products. While many of our accounts pay interest based on the country’s prevailing rates, fluctuations in the value of the currency against the U.S dollar could offset any interest earnings and result in a loss of principal at conversion. Keep in mind that currency prices are generally unpredictable and may be influenced by a number of different factors.
What you need to know before investing in the World Currency Market:
There are certain things that are essential for all investors and/or traders to know; the main one is to have a fundamental understanding of what drives the market and how to analyze that information before making your investment.
The fundamentals of the currency market are items such as interest rates, interest rate differentials, economic growth of a particular country or region, and the sentiment regarding its stability and often how it relates to the U.S. dollar.
If you think of the markets as a big clock, fundamentals are the gears and springs that move the hands around the face. Anyone can tell you what time it is now, but the fundamentalist knows about the inner workings that move the clock’s hands toward times (or, in our example, prices) in the future. This is an understanding that all investors or traders need to educate themselves about. Or you need to have a broker or financial manager you can trust, who knows how to analyze your investment and will guide you through it.
If you’re investing in a foreign currency, at a minimum, you should be aware that there are two main drivers of the currency market:
|•||First, economic growth. In essence, when you are buying a foreign currency, you’re buying a small piece of a foreign country. You’re investing in its people, its assets, its factories, and its stock market; in a word, you’re investing in its economy. For long-term investing in a foreign currency, you should carefully watch the growth rate of that country. For example, at this time, Europe is not growing nearly as fast as the United States, and India is easily outpacing both. But, what will affect these countries in the near future and will they continue to struggle or return to growth? History shows us that currency trends tend to develop a momentum of their own. If they’ve been going up and up for many years, driven by huge differences in interest rates and huge differences in economic growth, they have tended to keep going up.|
|•||The second thing you should be aware of is that interest rates may be the most important and most powerful driver of all. When investors buy a currency, they don’t just stash the cash in a vault. They typically put the currency in an interest-bearing money market account or in a time deposit, like a CD, for example. So, all else being equal, you’re going to prefer the currency that pays more interest. Currencies offering higher interest rates tend to attract more buyers than currencies offering lower interest rates. But, keep in mind that higher yielding currencies tend to carry higher risk and volatility. Chuck Butler often describes these currencies as having a “risk premium.”|
As you approach making your first currency investment you need to be asking, “What is ideal for me?”
What are your goals? What is your tolerance for risk? What size account should you open? How much should you invest? How often should you invest or trade?
These questions will help you see more clearly the type of instrument you should focus on. We have a range of FDIC-insured foreign currency products to choose from.3
WorldCurrency Access® Deposit Accounts:
If you are relatively new to the investment market, the WorldCurrency Access deposit accounts could be a good choice for you. EverBank is one of the only banks in the United States that allows you to own foreign currency in a way that is treated like a money market account. Although certain transaction limits may apply,4 these accounts offer daily liquidity, allowing you to buy or sell more than 20 different currencies whenever you choose. As world economies shift and evolve, you can easily move funds back into the U.S. dollar or into any of our other foreign currencies.
Single CDs or CD Baskets:
For those who want to take advantage of the values of the world currency market, and are looking for a buy-and-hold type of investment, WorldCurrency® CDs deliver an easy way for you to participate. These CDs can be useful in hedging your U.S. dollar investments or rounding out your long-term portfolio strategy.
WorldCurrency CDs are denominated in the currency of the customer’s choice and generally pay interest at the local currency rate.5 Depositors benefit when a currency appreciates against the U.S. dollar (i.e., when the U.S. dollar weakens) and can conversely lose a portion of principal if the U.S. dollar is stronger against their chosen currency.
The WorldCurrency CD Baskets were designed to allow an investor to gain additional diversification while reducing the entry cost.
Basically, the CD Baskets are a bucket of currencies that are held in a single instrument. EverBank allows its customers to get into these WorldCurrency CD Baskets at a $20,000 minimum, as compared to $10,000 for a single currency CD. This helps you gain exposure to a greater number of currencies at a lower entry level than if you invested in each one separately at EverBank.
It is important to note that some of the foreign currencies that EverBank offers are considered “Non-Deliverable Currencies,” which means that we cannot deliver those currencies to you; instead, they must be converted to U.S. dollars which may result in a loss, depending on the then-current exchange rate.6
So, How Do You Get Started?
It is easy; just complete the EverBank account application online.
Hopefully you have found this helpful, but if you have any questions, please don’t hesitate to reach out to our currency experts at 1.855.813.8484. They will be happy to walk you through the application process and answer any of your questions.
Have you been considering any currencies as investment opportunities? Which ones would you have in your portfolio and why? Please share your views with us by visiting our blog and leaving your thoughts in the Comments section.
Until the next Daily Pfennig® edition…
Chris Gaffney, CFA
EverBank World Markets, a division of EverBank