Three-monthly implied volatility for the Australian dollar is more than 12 per cent, which can leave many investors feeling uncomfortable.
– where the performance of investments will depend not only on the local asset returns, but also the fluctuations of international currencies versus the Australian dollar.
Historically, this has provided more stable total returns, but can create some interesting short-run challenges where physical assets need to be sold to cover out-of-the-market currency hedges. As most investors would appreciate, the Australian dollar is driven heavily by commodity prices . Other important factors that drive currency movements are short- and long-term interest rate differentials, relative inflation, economic surprises and broader capital flows. In addition, traders will often focus on technical patterns in currency pairs for indications of future direction.
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