FIGURE 1: DAILY CHART OF CURRENCY SHARES AUSTRALIAN DOLLAR (FXA). FXA has shown positive movement since June 2012. Prices appear to respect the 20-day moving average. But how long will this movement continue?
TRADING TICKET
Trading currency pairs tends to be more complicated than trading equities. So trading currency exchange traded funds (ETFs) make it much easier to participate in the largest financial marketplace in the world. But there are some things you have to be aware of. First of all, the expense ratios of currency ETFs tend to be higher than equity ETFs, even though they just hold one currency. Second, you are not investing in a basket of currencies when you buy single-currency ETFs.
But you are adding some diversification in your portfolio by gaining some currency exposure. Single-currency ETFs merely reflect the exchange rate fluctuations between a specific currency and the US dollar.
As far as taxation is concerned, currency ETFs are taxed as ordinary income for interest income and capital gains. This is for all cases regardless of how long you hold them for.
Data is as of July 16, 2012.
Currency Shares Australian Dollar (FXA)
This ETF tracks the price of the Australian dollar net of trust expenses:
Trading strategies
Given Australia’s role in commodity production, the Australian dollar is regarded as a commodity currency. According to S&C contributor Markos Katsanos, whose article, “To Cover Or Not?” can be found elsewhere in this issue, there is a strong long-term relationship between the Australian dollar and gold. He has found that the price of gold leads the aussie at bottoms but seems to lag slightly at tops. One thing to keep in mind when trading the aussie, however, is that it can be volatile and move drastically in a short time period.
FIGURE 1: DAILY CHART OF CURRENCY SHARES AUSTRALIAN DOLLAR (FXA). FXA has shown positive movement since June 2012. Prices appear to respect the 20-day moving average. But how long will this movement continue?