The global travel industry has taken a heavy toll under the pandemic. Hong Kong’s unflinching policy of a 21-day quarantine causes severe disruption to our plans to travel, study abroad and, for some, relocate. Before we know it, there’s one more thing that has changed: our sensitivity to exchange rates.
Are you still caught up with the Japanese Yen’s latest worth? Are you still concerned when 100 Japanese Yen dropped below 7 Hong Kong dollars? Not flying as frequently as we used to be, we are somehow losing touch with the up-to-date conversion rates of popular tourist destinations.
Exchange rates, however, are not only relevant in vacations. Think investment.
Planning for the post-pandemic life
In financial planning, it is necessary to put together an appropriate currency allocation in the long run. Nowadays, life planning often includes locations beyond their birthplace, such as sending children to schools in the UK, the USA, Australia and even Singapore, or retiring in a place with a beautiful landscape. These are important decisions not to be muddled by the pandemic.
As with the ever-evolving state of world affairs, the life planning of our generation has to keep up with changes and allows for possibilities across multiple countries. In a globalised world, it is so common for people in this generation to be born in one country, go to college in another, and turn out to settle in the third. For the new generation, prospects are everywhere, and they follow where opportunities lie. As such, flexibility is essential when planning for yourself and your children.
It is worth keeping in mind that forex trends are notoriously elusive and surprising. For those already having plans at several regions, consider making appropriate currency allocations in your plans to stay off any chance of having your budgets stretched because of currency disappointment.
How to deal with forex trends?
Speaking of this, maybe you want to know how to predict currency trends.
Again, the foreign exchange market is highly unpredictable, and there are numerous schools to capture trends, say charts and technical analysis. All I can say is you should allocate currencies based on your life goals.
Perhaps that “based on your life goals” could be a bit abstract. I will give a rather vivid analogy to illustrate how to make sense of forex trends.
Big Mac Index reveals the true value of currencies
Have you ever seen the same merchandise sold in various parts of the world but costs incredibly differently? Travel-holics may want to give an understanding smile on this.
You got it: I am talking about the Big Mac Index invented by The Economist magazine. It compares prices of the globally famous burger in several countries or regions in order to estimate how much one currency is over- or under-valued.
To take an example, let’s assume the current exchange rate is 6.4 RMB to US$1. That burger costs about US$5 in the United States (that’s 32 RMB), which in China is sold for 20 RMB - thus, the “burger exchange rate” is 1:4. Holding other factors constant (such as tax, business competition and tariff for ingredients), the yuan, under this theory, is 38% undervalued.
According to the latest compilation, it takes only US$2.64 (HK$21) to get the burger in Hong Kong, as compared to US$5.65 in United States. That implies the Hong Kong dollar is undervalued by 52% against the greenback. Although, the truth of being over or undervalued of once currency may only know by the government itself, but these data still make life easier for investors how to set aside their capital to currencies with more significant potential.
Choosing products with multiple currency cover is a safe bet
It must be noted that currency rates are the result of many factors such as macroeconomic and even political. Under the current macro setting, not everyone can likely do tallies right for their investment options and accumulate wealth as planned.
But if you don’t have the gift to “look through” the markets or take such risks, what can you do to grow your wealth in a stable manner while maintaining flexibility in currency allocation?
Currently, there are savings insurance plans that allow you to denominate the policy in a local or foreign currency, together with an option to convert them into another currency. Perhaps they are what you need precisely. Learn more: https://www.axa.com.hk/en/fortune-xtra-savings-plan
The above content is reviewed by Mr Daniel Lau - Head of Investment Proposition of AXA Hong Kong and Macau
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