Big Mac FX & SRS Portfolio - 26 Feb 2023

Forex has always been intriguing to me as to what drives the exchange rate, especially after the launch of the Big Mac index. It started as a humorous way of explaining purchasing power parity but has since been "adapted" in various forms to explain how directionally a pair of forex should move. 

If only life is as simple as a Big Mac . . . this chart below is the USDSGD chart since 1982. The USD has been on a long term down trend since 1982 but has been fluctuating in tighter bands since 2010.

USDSGD movement since 1982

I remember traveling to USD in the lates 90s and imagine if you are a SGD investor, having assets in USD, it will probably be quite painful - which explains why the older generation here are more adverse to USD investments, whereas if you are a younger investor born after 2000, you probably wouldn't feel as adverse and are more used to investing or punting in USD since you would likely have traded Bitcoin and US stocks.

5Y USDSGD Chart

If I zoomed into the last 5 years, you can see that it is more volatile. If you see how USD melted down in the last 3 months, it is actually quite spectacular from 1.44 all the way to 1.31 in a matter of weeks.

What does it mean for an SGD based investor like me who borrows and invest in USD assets. You need to be pretty alert. Currently the cost of borrowing in USD or SGD are almost the same, so you are better off borrowing in USD if you want to invest in USD assets for a natural hedge. 

However, if you want to borrow in a currency with a lower interest rate, such as JPY or CHF, then you need to watch the movement in USD against those currencies. 

5Y CHFUSD Chart

I have been borrowing CHF since 2018 and you can see my heart goes on a roller coaster ride. 😅 Initially I looked like a genius as CHF interst rate was zero but when covid struck, the USD depreciated and I was sitting on huge capital losses. Thankfully I managed to control my itchy fingers and stayed on the course and saw the CHF rate depreciated when the FED started to raise interest rates. 

I managed to convert my CHF Loans to USD in 2022 and then switched back to CHF and SGD loans again recently.  I guess I have gotten better at timing the loans over time and learning to ignore the unrealised capital gains or losses while i wait for the forex rates to hit the key support areas.     

The forex markets actually made me more in tune with the markets, not just how much one big mac cost in each country. 

With USD moving back up, it is not a good sign for the markets as it means that investors are risk off again, so I guess we are in for another volatile first half. Put on your seat belts and helmets.

For my SRS portfolio, nothing much has changed. The portfolio value as of last friday was $364,016. I have yet to contribute into my SRS account, still waiting for my bonus (if any...) !!!

Happy SRSing (and I am still clueless what drives the FX rates).