In your piece today [Ed. Yesterday] on bonds the foreign exchange rate aspect was not mentioned. Several years ago many international investors were tempted by the relatively high yields on Australian bonds. Non-Australian investors have lost out on the fall in the value of the Australian dollar.

Eoin Treacy's view

Thank you for highlighting this issue which has been a topic covered in the Friday audio commentaries for at least the last 18 months. While the Dollar was trending lower, investors in emerging markets and commodity producers had the luxury of capital and currency market appreciation as well as being able to pick up a competitive yield. 

With a resurgent Dollar the status quo has been shaken up and that is creating both risks and opportunities across a number of assets. Since foreign issuers of US Dollar debt represent significant weightings in bond indices, the strength of the Dollar is a potential headache for investors in bond ETFs. 

The quantity of US Dollar denominated debt issued by companies in Latin America in particular but also in Asia represents a headwind as long as the Dollar remains firm. This is particularly true in a low commodity price environment. In the Musings From The Oil Patch report I posted yesterday Allen Brooks highlights how 18 exploration and development companies have so far filed for bankruptcy protection in Texas. The energy sector globally is under similar pressure but state owned companies with patchy histories of controlling costs represent greater risks. 

The Dollar’s advance has weighed on US gold prices but has been a tailwind for the metal when redenominated into other currencies. That helps to explain why gold prices have not accelerated lower in line with energy prices and some industrial resources. Gold firmed today ahead of the FOMC meeting and a sustained move below $1050 would be required to question potential for a reversionary rally.