Currency matters for trading

It is no secret that the US dollar has been in decline for the past 5 years. Today, I decided to take a further look at this against the CAD, Euro and the Japanese Yen and came up with this plot using UBC's Sauder School of Business's pacific exchange rate service.



The Canadian dollar and the Euro is currently up 50% as discussed in a previous post. The Japanese yen, not doing as well, is up 10% over the last 5 years. Now considering the following case, suppose that you were a US resident investing in Canada or Europe with a 10% yearly return on those investments. The return on those investments would yield a 61% portfolio increase. Now, if one were to add in the currency effects in to the equation, a 140% portfolio increase would result. The net returns from a portfolio also taking advantage of long term currency changes can double the capital gains made on an investment.

As a result of this, it is not just important to know how well the company is doing, but one should also take into account how well the currency will do in the future when making investment decisions.