Historically, the Australian dollar (AUD) has been seen as a ‘risk currency’ relative to the USD, meaning it typically depreciates in response to a negative change in risk sentiment (and vice versa). This means that, for Australian investors in US equities, unhedged exposure has tended to cushion AUD returns in times of market volatility.
International investing often comes with exposure to foreign currency movements, which can have a significant impact on returns. The more volatile the exchange rate between two currencies, the higher the risk and potential impact on returns. For investors wishing to reduce this volatility, currency hedging can help minimise unintended currency bets.
Currency risk arises from the change in price of one currency versus another. In the same way that companies’ shares rise and fall in value, so do currencies, when compared with one another. When buying or selling an investment denominated in a currency different than your base currency, the exchange rate of this foreign currency with the base currency forms part of the investment returns.
