Why I Don’t “Invest” In Currencies

In a previous post, I explained why although I am bearish on the Euro, I did not sell the Euro and buy the USD. In this post, I’d like to further expound upon my belief on why I don’t “invest” in currencies, nor do I trade them.

No One Has Consistently Made Money From Currencies

Even the legendary trader George Soros hasn’t. Although he had several spectacular wins against Asian currencies (and the British Pound) in the 1990s, overall, George Soros hasn’t made a penny from currencies. In the late 1990s, Soros attacked the Hong Kong dollar, but little did he know that the powerful Chinese government would support HK. To make a long story short, Soros lost everything that he made from trading other currencies on the bet against the Hong Kong Dollar.

So why is “investing” in currencies so hard?

Currencies Are Meant to Be Traded, Not Invested In

Over a long period of time, the stock and real estate market will go up – as a result, these markets are ideal to investors. However, over a long period of time, currency pairs (e.g. Euro to USD, Yen to USD) are essentially flat (unless a country’s currency becomes worthless), which means that the only people who make money are traders who time their trades. In addition, correct timing is very difficult to grasp on every trade.

Currency Movements Depends Too Much On Political Policy

Because currencies belong to nations, their price movements are highly dependant on political policy. As a result, it becomes essential to PREDICT political policy if you want to trade currencies, which is extremely difficult to do. When predicting the decisions of politicians, we try to put ourselves in their shoes and see what they see and think what they think. In essence, we try to apply LOGIC to decisions that they need to make. HOWEVER, what the politicians are concerned about and what logic implies are often different things.

For example, the country’s economy is languishing along. From a logical perspective, you’d expect the politicians to do some fiscal easing to jump start the economy. However, the politicians are considering something else – their upcoming election. If they do fiscal easing now, they might not win the election. So although the economy needs fiscal easing, the politicians won’t do that because from their point of view, fiscal easing isn’t good for electoral results. They don’t care about the economy, unless it will impact the election.

You Have to Leverage Up

Currency movements are small – they might move max. 15% in a year. Hence, you must trade currencies using leverage if you want to make meaningful returns – that is why the minimum leverage that brokers will give you for currencies is 10x. But the problem is, leverage causes problems.

You can’t act on a long term trend. On of the main reasons why I’m not trading against the Euro is that I expect the Euro to be in a long term decline. The problem with investing in long term currency trends is that a small correction will wash me out of my position at the worst moment.