The Australian Dollar is a 'risk currency' that undergoes large sell-offs in times of heightened uncertainty and falling markets

The Australian Dollar is a 'risk currency' that undergoes large sell-offs in times of heightened uncertainty and falling markets. This means that foreign domiciled assets held by an Australian investor will appreciate in value as the Australian dollar falls, boosting performance when it is needed most. The negative correlation to equity markets is strong, since December 1996 the rolling 3 year correlation between the S&P/ASX All Ordinaries and a basket of developed market currencies is -0.5. As demonstrated by the below chart, adding developed market foreign currency reduced the total fund risk. Interestingly, the impact of adding emerging market foreign currencies is only marginally less pronounced. Indeed for a reasonably large exposure there is a reduction in volatility. In this article we discuss the benefits of foreign currency exposure in a diversified fund and whether you should hold this exposure in developed or emerging market currencies.