Mr. Flipper_58, Could you please explain to me how the following factors affect the NAV of FAX: a. Rate of exchange (A$ vs US$). b. Direction of interest rates in Australia & in the U.S. c. Inflation rates in both countries.
There are a number of folks that could answer probably better than I but here's an overview.
The NAV is effected by: 1)exchange rate.....the fund owns Aussie bonds, etc...since we want $ in US dollars the fund must exchange the interest and and bond proceeds from the AUD the $US. The exchange rate goes up and down....so if the AUD goes down relative to the $US then the portfolio, as valued in $US will go lower even though the Aussie value of them might have not changed. 2)direction of rates....first as you may know if bonds yields go up the price of exisitng bonds will drop to compensate for that higher yield. If rates are climbing, bonds portfolio's values are dropping. Inflation drives interest rates up or down. Rates are climbing in both countries. Depending on the rate of increases relative to each other (Australia versus US) it can have an effect on the countries currency. If rates are HIGHER in Australia than the US chances are that investors will want to be invested in Australia pushing up the value of their currency. Also the countries balance of trade (Import versus export) deeply effects a counttries currency. If countries import more than they export, this means when exporters sell AUD's to exchange back into their own currency it forces the value down. We've been lucky in the US and many of our major creditors(Japan, China) have left their money here versus selling and converting back to their own currencies. It's difficult to see how long this will continue. Australia too, has been running record trade imbalances(deficits) putting pusher on their currencies.
To get really complicated, Gov't policies must balance their own interest rates to attract foreign capital and also try to control inflation in their own country. In the US, the FED is lucky that so much of our trade deficit money stay here...most other countries are not so lucky and must lock step rates up with the US in order to keep their interest rates competitive enough.
In a reply to d_kim_2000 on 11/22/1999, flipper stated "many of our major creditors (Japan, China) have left their money here versus selling & converting back to their own currencies". I don't believe that repatriation of a foreign currency is possible (on a net basis) versus the U.S. dollar. When a Japanese corporation that has earned U.S. dollars needs yen, they might sell the dollars to the Bank of Japan, or on the world currency market. Somewhere there has to be someone willing to trade yen for those dollars (even if that someone is the Japanese government running the yen printing press). The new holder of the dollars must then sell them to a new holder, or purchase U.S. treasury bonds, stocks, properties, or exports. Even if they buy some other countries export denominated in dollars (such as oil), someone ends up holding those dollars. I believe that most of the trade deficit dollars end up in U.S. treasuries keeping our interest rates down, and indirectly thereby, our stock market up. For the Bank of Japan to start dumping dollars for yen would drive the yen into the stratosphere, destroying the Japanese export market and economy. Hence, they hold the U.S. Treasury bonds. George Soros would call this a virtuous circle. This situation can only change when other countries are forced (by economic events) to develop their own domestic consumer markets and stop depending on trade surpluses with the U.S. Until then, they are trapped holding dollars. This only works for the U.S. since we print the worlds key trading currency. In the future, the Euro will be a competitor with the U.S. dollar, and Japan and China will accept mountains of Euro Bonds for their manufactured goods. That is my analysis anyway. Can anyone see any flaws in it?