Foreign Exchange, (Forex or FX), is one of the most common things in
the world of finance. It allows you to exchange one currency for another
at any point in time at the most recent prices. Can you invest in it?
Here’s a fresh take on it: It looks complicated, but it really isn’t. If you can
understand it well enough, it’s a good tool that every investor should
know how to make use of. In this article, we’re starting with the basics.
What is Forex,
and where is it used?
Forex stretches far beyond money changers, when you travel overseas,
shop online or even the many expatriates or migrant labourers who send
money home. The Forex market is a lot larger than just that; its part and
parcel of our everyday lives. To give you an idea of the size of the Forex
market, here’s an example:
The container terminal of Hong
Kong processes millions of tonnes
of cargo around the clock. It’s all
paid for by buyers and sellers
across the world using various
currencies. Without Forex, none of
this would be possible.
It’s solely not limited to physical goods, think about corporations or
governments investing in foreign countries or making bond market
repayments, all of this depends on the exchange of currencies. Forex is
pervasive in our modern world - it is everywhere you look.
“The forex market is gigantic:
In 2019, USD $6.6 trillion
was traded per day”
Source: FX markets, The Triennial Central Bank Survey by the Bank for International Settlements.
How some currencies
become as ‘good as gold'
The pre-independance US Dollar:
Over two and a half centuries later,
it’s now the world’s reserve
currency. The strength of currencies
takes time to develop, and is driven
by trust, stability and wide usage in
all kinds of transactions globally.
Currency strength: some key factors to look for
• Healthy supply and demand • Balanced inflation levels •
Well-managed monetary supply (eg: controlled money printing by the central bank)
• Political aspects such as stability, acceptance into Free Trade Agreements or regional unions
• Low corruption or wastage of public funds
Strong currencies are considered ‘safe haven’ currencies you can hold in
volatile times. Based on the factors above, they tend to be stable over time.
Swiss Francs
(CHF)
Strength due to stability
of Swiss government and
financial system.
US Dollars
(USD)
The world’s reserve
currency used by central
banks and financial
institutions internationally
Japanese Yen
(JPY)
Known for high tech,
innovative design of
manufactured goods – an
‘eastern’ alternative to
western currencies
Australian Dollars
(AUD)
The world’s biggest coal
and iron exporter.
Resource-rich, and a
major exporter of
petroleum and gold.*
New Zealand Dollars
(NZD)
The world's biggest
exporter of concentrated
milk. Also exports other
dairy products, meat, and
wool.*
Canadian Dollars
(CAD)
Relies on exports of
natural resources like
timber and fuels. The
price of oil is a major
driver in the economy.
*Source: Observatory of Economic Complexity (OEC)
MYR: The good,
the bad and its future
Malaysia is considered an emerging market – a developing nation that is
transitioning from a low-income nation to a modern, industrial economy
with higher standards of living.
Part of this transition will see both high inflows and outflows of foreign
investments, making the Ringgit a relatively unstable currency.
Malaysia’s top four exports:
However, these products and commodities have volatile prices, and in turn,
they affect the volatility of the Ringgit as well.
The volatility of any currency can also driven by political stability and the
ability to withstand geopolitical pressures, resolve corruption scandals and
put in place concrete economic growth plans amongst many other factors.
How much USD or SGD can you buy with RM1?
Over time, we see constant reminders
that the MYR is worth less and less vs
the USD and SGD. For those looking to
protect the value of their savings, it
may be good to diversify your currency
holdings to include strong currencies
like the USD and SGD amongst others.
Time to start
investing in Forex
Forex trading can be a good active strategy for investors. Wise investors use
it to diversify their investments to try to reduce their overall risk. They tend
to monitor and buy into currencies when prices are lower. The forex market is
ideal for this approach as it is highly liquid and has fast-moving trends. As
with all things in investing, if you understand the market you can do well.
Two simple ways to get started:
ONE: Use what you may already have; your HLB account. You can use it to
hold your foreign currencies and even check the latest rates through the HLB
Connect app.
To learn more about opening a foreign currency account, click here!
TWO: When investing in the various funds we offer, many allow you to
denominate your investment in a foreign currency. It’s a simple way to gain
exposure to other currencies. Ask your investment advisor for help!
This article is part of Hong Leong Bank’s educational series, called ‘Fresh Take’.
Here, we seek to present you a fresh, unbiased perspective of all matters financial.
We’ll be uploading more educational content moving forward, so do watch out for
the next piece.
In a world that’s awash with information that may be either true, false or
anywhere in between, Fresh Take aims to cut through the clutter, and help you on
your journey as an investor who’s seeking to build a strong financial future.
Please reach out if you need to know more,
or need personalised help