by Bob Nicksic
In the last issue I shared my opinion that although the Aussie dollar might spike briefly to new highs, as high as 1.10 to 1.15 per US dollar, I believe economic conditions favour the Aussie to eventually decline in value toward its average ‘equilibrium’ point of around 75 cents/US dollar, perhaps by year’s end.
So what should an Australian investor considering buying property in Bali or Thailand do?
Let’s say you want to buy a villa in Bali or Phuket within the next 9 months. Your budget is AU$ 500,000. If you’re satisfied with the purchasing power of the Aussie now (and you should be), you could convert 500,000 Aussie dollars into rupiah or baht today at near record high exchange rates. Another alternative is to use a forex trading account to ensure that your $500,000 will retain today’s purchasing power and buy you the same amount of property in the future, even if the Aussie dollar falls by 25% to 75 cents US. It’s called ‘hedging’.
A more traditional example of hedging is the corn farmer at planting time. Corn is at $5/bushel. He expects to harvest 100,000 bushels. He hedges the value of his as yet unplanted crop using futures contracts to short the corn market. He sells 100,000 bushels of corn using futures contracts. If corn drops $2 per bushel by harvest time, he makes $2 on each of 100,000 bushels, so his futures account makes a profit of about $200,000, offsetting the $200,000 drop in his crop’s value. No sleepless nights.
In much the same way, a property buyer can rest easy and be assured his $500,000 will retain roughly today’s buying power (in $US) at any point in the future by using forex trading to short the market.
Properly done, if the Aussie falls 10 cents (about 10%) his forex trading account should show a profit of about $50,000. If it falls 20 cents (about 20%), he should profit approximately $100,000. This offsets the $100,000 loss in purchasing power of his original $500,000. However, if the Aussie strengthens 20%, the increased purchasing power of his cash is offset by a $100,000 loss in his forex account. Either way he is assured of having approximately today’s Aussie dollar purchasing power at any point in the future (minus commissions, fees, taxes, etc.) Again, no sleepless nights.
A properly managed forex account funded with 50,000 to 100,000 Aussie dollars can protect your half-million Aussie dollars from a 20% fall in the Aussie, by bringing you back a net profit of $100,000 should the Aussie dollar fall. Make sure you consult your broker’s advice on hedging before trying.
And remember, as always: “What goes up like a rocket comes down like a rocket.” Don’t be greedy, bulls make money, bears make money, but pigs get slaughtered! Happy trading!
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