Impact of foreign currency investments on returns (view from an EUR Investor)

This post is also available in: Deutsch (German)

This post is not about a specific marketplace, but the impact which investing in foreign currencies can have on our yield. Especially Mintos offers a lot of currencies to their investors to invest in. I have checked the development of some foreign currencies against the Euro during the past 10 years. It is a view of an Euro investor who invested in different currencies.

Why investing in foreign currencies?

There are lots of reasons, but I guess the main goal is to get access to higher yieldings. Higher coupons look more attractive then lowers. Who does not want to invest in 5 percent bonds, if you get only one percent in your home currency (to make it easier, I set coupon = yield to maturity, which is only true, if the bond price is at 100%)? It is not that simple though. The difference of 4% (5 – 1%) is without risk, exchange rate risk, which you onboard. It can be very quick and your 4 percent yield advantage ends up in smoke (usually higher yielding currencies weaken because of higher inflation expectations etc), or you are lucky and your chosen currency increases in value. No one knows beforehand! Further you need to understand that every currency exchange comes at a cost which reduce your return. So you should check the offered exchange rates closely. Mostly the offers from transferwise, currencyfair or revolut are very good and you save a lot of money by using them.

What happened during the last 10 years?

Source Bloomberg / own depiction, monthly data (31.12.07 bis 29.12.17), indexed

Throughout the last 10 years we saw many crisis (financial crisis, euro debt crisis etc). So there was a lot of movement between currencies. Ultimatively I am surprised how many more or less stable currency pair there were, even there were outliers. Above you see an illustration with the performances of seven currencies against the Euro over a timespan of 10 years (31.12.2007 bis 29.12.2017). Below if have added a table with the yearly returns.

You see for example if somebody had changed EUR to Swiss franc, he would have made more then 40 percent. Ok this example is extreme. Against the safe heaven CHF, most currencies had not the slightest chance. The illustrations though shows that there were extreme movements, but over the years it relativise most of the times..

A closer look

Source Bloomberg / own calculations, yearly returns

I start with the table above. An Euro investor would have made profit from investments in CHF, but lost money with GBP and Polnish Zloty investments. This means conversely that GBP Investors made money by investing in Euro, same is true for PLN investors. This statement is only true in this 10 year context, just to be clear. What is really important is that in my calculations I have not included any yields, only price changes. This means that if you had invested in p2p or elsewhere which returned some percent annualy, there would not be a loss in any currency. If we take a holding period of 10 years plus reinvestments (compound interest) into the calculation, the outcome would be even better. You see, there are only 2 outlier years which have a massive impact on the total return.

From the following four currencies only the investment in Georgian Lari returned negative. A special case demonstrates the Danish Krona as the Danish National Bank pegs the DKK to the EUR. There are only minimal yearly deviations.

Source Bloomberg / own calculations, yearly returns

Conclusion

Investments in foreign currencies can be beneficial, but are risky. If you cannot swallow fluctuations should stay in his base currency, there are engough investment possibilities. I will update the performances of the currencies quarterly. If you want me to add further currencies, let me know. Again: I have not included any yield figures in my calculations. This means, if one had invested for 10 years with a yearly return of 2.5 percent only, there would be profit in any currency pair. This is not investment advice, but only as basis for your decisions.

2 Replies to “Impact of foreign currency investments on returns (view from an EUR Investor)”

  1. real good post about the risk with using foreign currency. Since im using Mintos quite a lot and there are much higher yield in some minor currency could you include some calculation on what increase in interest rates would make it worth investing in the different currency?

    1. Thank you. I could try that, but there are a lot of unknowns in there: fluctuation in interest rates etc, plus I would need to take into account past yields for projections etc. I will need to think about the best way to create something. Interesting subject though, thanks again.

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