The Australian to Singapore dollar exchange rate has fallen sharply from almost 1.29 to 1.16 from April till now. It’s fall reflects a change in mood, as the Australian dollar is an indicator of global risk appetite.
Often, you will see a correlation of the Australian dollar with other risk assets (eg equity markets) due to the carry-trade.
In a carry-trade, people borrow in low interest currencies (eg US, Eur) and invest in currencies with better interest rates (eg Aus). The carry-trade in the Australia dollar has been at very high levels just prior to the plunge.
When volatility is high and there is uncertainty in the markets, many people will unwind their carry-trade by selling their Aussie to buy back their funding currency. The pace of this unwinding has lead to a sharp drop in the value of the Aussie dollar.
In the space of a few weeks, market sentiment has also changed completely. There is now heightened awareness of the problems facing Europe, which cannot be discounted simply as a Greece problem. The sovereign debt is weighing heavily on the balance sheet of some European banks, and we have just seen bailouts of a couple of Spanish banks. Will this be the start of more to come?
And the tensions in the Korean peninsula does not help.
I like to invest when sentiment is bad (as I can pick up cheap assets) but at this moment, I am just going to sit around to watch the events unfold.
There is a time to invest and there is a time to wait – and waiting is often the hardest thing to do for most investors.
The situation is quite interesting when people approach me about investing their money one or two months back and I had to tell them that it’s probably better to wait.
On the other hand, most people will shy away when I mention that it’s a good time to invest (when things are ridiculously cheap). Oh well….