How can I intelligently hedge my currency risk?

[ertyu]

Right now, I have some cash in a US dollar money market fund, some cash in Ishares 0-1 Treasuries and some cash in Euro. (Yes, it is moronic to be all in cash, I am aware. I also don't have any better ideas).

As those who follow the exchange rate will know, the euro has recently appreciated against the dollar. This means that in euro terms, I have less money than before by an amount that is psychologically significant to me and freaking me out (it is now 3:10 AM, and I cannot sleep with dread). I find myself in intense fear of further loss and wanting to exit the position to base currency, which will lock in my losses. I am hesitant to lock my losses, plus, as the highly evolved rational individual I am, I flipped a coin and it said not to.

The issue comes with how IB has prohibited me from buying or selling currencies or from trading CFDs. There is a notification saying that they can just make this decision without explaining themselves to me and the low-level customer service employee I spoke to said she is not at liberty to disclose why the decision was made or reverse it. I assume I met some statistical pattern of being an idiot which, in all honesty, is not that difficult seeing as I am an idiot. Mostly, I have a pattern of just wanting to stop the bleed when things get like this, exiting the position, and locking in losses. As I said, idiot.

The problem remains, though, that I still need some way to intelligently hedge a currency move that is going against me. The things I am allowed to do are (1) sell the money market/ishares and (2) convert to base currency (euro). Also, I can buy an asset denominated in any currency, and when I sell it, the proceeds will be deposited in my account as that currency. I could technically be long euro by buying a, say, SP500 ETF denominated in euros and shorting the same ETF in dollars. I haven't done the math, but I'm not sure I'll come out very much ahead after fees. Plus I am unsure whether this will not expose me to the underlying risk of the ETF's price movements.

I have been considering changing brokers, which would be a monumental pain in the ass as I am now located outside of my country of origin.

In the mean time, the euro is appreciating even in the face of the latest fed hike. Plus, the eurusd tends to trend for a long time. It seems to me that this strength will persist. I will also not be at all surprised if for strategic reasons, the Fed is intervening in the currency markets to prevent a full dollar milkshake (and hiking into an inverted yield curve to sterilize that). I am very much afraid that the exchange rate would keep moving against my position.

What would you do in my situation? Ideally, I would be not-an-idiot and I would come up with intelligent ways to invest my money that would preserve wealth (I am fine with saving 50x and living on peanuts just someone make the bleed stop). However, the fact is, in the meantime, I am an idiot and I know neither how to hedge out my position nor how to come up with investment ideas that could keep me safe. I probably could, given time, but the fact that I'm terrified means I cannot really think rationally and exit the overwhelming cloud of fear. So, I realize that the ideal outcome would be to commit to an actual asset in an informed trade, but psychologically, I am currently incapable of devising such a trade, let alone having any conviction in it(*). In the meantime, I've worked half of last year for nothing. I have sacrificed and saved for nothing.

(*) It is starting to dawn on me that this is a larger problem with decision-making. I make decisions either impulsively or I struggle for a long time without being able to choose until in the end circumstances force my hand, as I did with quitting my current job, for instance (I was offered the option to remain through until the summer of '24, and I chose to leave during the summer of '23 -- by procrastinating on taking action and letting the offer expire while spending the last two weeks in the grips of anxiety-laden indecision.) Youtube says it's the cptsd -- or, flippancy aside, that it's a common issue with people who were raised like I was. The way this is relevant to the discussion is that while I am working on not being an idiot, I am unlikely to stop being an idiot overnight.

[zbigi]

My take on similar issues I face is that - future of currency market is completely unpredictable (at least for people on my level). Just three months ago, when dollar was breaking its historical records, the pundits were saying that it will stay like that for a long time, and will likely appreciate even more so. They were giving plenty of reasons for why that's inevitable. And here we are now, three months later, and dollar has lost 10% of its value just like that. I think I need to stop worrying less about things like that, and need to start worrying about diversifying my income more.

The broader conclusion is that you can probably beat the financial markets only if you're genuinely interested in them an are willing to put in years of work on that - like Buffet, or Jacob. Everyone else is the fish.

[jacob]

Currency trends are amongst the most predictable market trends around on a multi-year basis. They're the macroest of macro. They even avail themselves to simplistic/technical trading. It's just a fact. However, returns are unimpressive unless leveraged. (This is also why the wild west of currency trading offers the most suicidal terms of leverage in the business.)

The best way to hedge is to stick with your residential currency or hand it over to professionals. I say this living in the US which is [one of?] the best developed capital markets I only make discretionary decisions for US stocks. I hand over offshore investments to professionals. Some ETFs are currency hedged wrt USD too.

However, I'm on easy-mode living in the US and mainly investing via US domestic or US foreign vehicles.

What would I do if I lived elsewhere?

I'd probably ignore that stocks-stocks-stocks vmeme insofar stocks weren't a thing in myCountry. I'd look at what the tax laws favored. They'll point you in the right direction.

[zbigi]

In a non-US country, partial investment in US stocks can be a good hedge against local currency going south. Also, with the homogenization of everything thanks to Internet (basically all countries trending towards US culture), I suspect stocks will be increasingly a thing in the coming decades even in countries where they're now treated by most people as something not for them (e.g. Poland).

[ertyu]

In a non-US country, partial investment in US stocks can be a good hedge against local currency going south. Also, with the homogenization of everything thanks to Internet (basically all countries trending towards US culture), I suspect stocks will be increasingly a thing in the coming decades even in countries where they're now treated by most people as something not for them (e.g. Poland).

re: stocks: Maybe, but I'm not sure. Stocks were only ever a thing because of 1. free capital flows and 2. the 60/40 portfolio worked. Neither of those is a given as we look ahead.

[zbigi]

Yeah, I would not buy the US stocks at their current prices, not by a long shot. But if P/E ratio of SP500 were to drop to around 10, then it becomes a reasonable proposition - more risky than real estate, but without having to become a part-time landlord, and with the added benefit of currency hedge. I wouldn't put more than 20-30% of my money there in there either, as it's meant to be a hedge, not a primary vehicle.

[Seppia]

The issue with the OP doesn’t seem “edging” but rather a disconnect between his/her risk tolerance and the assets held.
If a 5% move in euro usd from some of the all time highs results in sleepless nights you should not be holding anything but the local currency.

Op could consider:
1/ looking at the bright side: assuming the usd have been acquired 12 months or more ago, he/she’s still very much in the black VS holding euros
2/ accept that the other side of the “diversification” coin is that you will always have a part of your portfolio that is underperforming another part. The glass half full version of it says that while diversifying you always hold the best performers as well.

[sky]

Having cash right now is a good thing. If I were living in Euroland, I would be very happy to have about half my investments in USD. All it takes is one Chernobyl type event and the Euro will crash compared to the USD. Over the long term, the US stock market is a better choice because the law and financial system are designed in a way that is favorable to capitalist development. Too many odd actions have been and will be taken by governments in Europe. I don't have any good advice about how to invest at the moment, my strategy is old and may be outdated. I still like US dividend stocks, especially dividend aristocrats. I think that they have a reasonable dividend return at the moment and a big potential increase in value in the next bubble. A significant part of my monthly budget comes from a German government pension paid in Euros, so I am very aware of changes in exchange rates. I just ride them out and don't sweat the changes too much.

[ertyu]

Op could consider:
1/ looking at the bright side

Oh, OP is absolutely fucked Lagarde just announced a hawkish turn and IB is closed for maintenance I can't even exit to base currency right now

@Seppia, you are spot on, on both of your points. Too little too late but, time to go to cash in euro, I guess

[frommi]

The cheapest way to hedge is normally to buy/sell eur/usd futures. But you always pay the interest rate difference between the currencies over time when you do. So when you just invest in cash/short term us treasuries there is no difference between moving your funds to euro or hedging them. (at least if you get close to the "market" interest rates in both currencies bonds). (and with fees hedging will probably be more expensive).

But when you already freak out by a 10% move of a part of your money against you, you have other problems that have to be solved

[ertyu]

when you already freak out by a 10% move of a part of your money against you, you have other problems that have to be solved

correct.

I wouldn't freak out this much if I had more than enough so that even with the drawdown I'd be fine. Right now, at 2%, I am at 333 euro per month, no other pensions etc. This is it. 10-15k eur is a significant amount to me. I work almost all year for this. Two solutions -- well, three -- suggest themselves: (1) increase amount of savings, (2) increase investing knowledge and ability to construct and place intelligent trades, and (3) psychological aspects of decision-making.

[frommi]

If i were you i would read a lot of books about investing, at least thats what i did years ago (i think my counter is at roughly ~50, at that point i got nothing new out of the next book and i stopped reading investment books). Find a method/system that resonates with you and than just execute, execute execute. Results will come. Don't think one trade will make of break your life, if it does you are probably not onto something that will guide you through the rest of your investment life. And if daily quotes of your finances are a problem for you, maybe even real estate is the way to go for you. Cash is just a bad way to counter inflation and typically you will lose money in real terms in cash, its just not visible nominal.

[WFJ]

OP, stop trading anything. Follow the most basic asset allocation model and get a job at Chipotle. The extra money you earn will 10X any return you generate in attempting to hedge currency risks. Currency hedging is INCREIBLY risky and introduces all kinds of issues with taxes and leverage that require advanced skills.

[ertyu]

OP, stop trading anything. Follow the most basic asset allocation model and get a job at Chipotle.

This is incredibly wise advice given how I have the psychological constitution of a soft tomato when it comes to market risk. But didn't we just declare the 60/40 dead now that we finally have rising rather than falling interest rates?

[Lemur]

Well you can either pick your own stocks and do currency trading and lose.
Or you can index fund 60/40 and lose money with friends .

At least with the latter, you don't have to blame yourself as much lol.

Sorry, just that market is crap, interest rates keep going up, productivity is on the down, and Shiller PE Ratio is still 27.82. Its not completely rational...but set it and forget it index investing + focusing on other things is much better for mental health. And your R.O.I. will probably be better in the long-run anyway.