Foreign Currency Investment Guide: How to Buy Foreign Currencies, Earn Exchange Rate Differences, and Diversify Asset Allocation

The Difference Between Currency Trading and Forex Trading

"Foreign currency" and "forex" are two related but different concepts. "Foreign currency" specifically refers to the currencies of other countries, excluding the domestic currency, and is a form of forex. Investors in the forex market mainly focus on the fluctuations of various foreign currency exchange rates to select currencies with investment value. On the other hand, "forex" refers to the assets held by a country denominated in foreign currency and various payment instruments available for international settlement, including bank deposits, government bonds, etc., which can be used as claims when there is a deficit in international payments.

Forex trading includes:

1. The buying and selling of foreign currencies (banknotes and coins)
2. Foreign currency payment certificates transactions (bills, deposit certificates, savings certificates)
3. Foreign currency securities trading (government bonds, corporate bonds, stocks)
4. Transactions of other forex assets

Forex Main Uses:

1. Payment and credit tools for international trade and clearing.
2. Adjust the surplus and shortage of international funds
3. Important international reserve resources of the country

The main uses of foreign currency are for goods payment and currency exchange. It can be said that: forex trading encompasses the buying and selling of foreign currency, and the buying and selling of foreign currency is a method of forex trading.

Forex Investment Profit Mechanism: Exchange Rate Differences and Interest Rate Differences

Foreign currency, as a financial product, can be regarded as a bond with no expiration date and fluctuating interest rates, with investment returns derived from 'exchange rate differences and interest rate spreads'.

Exchange rate difference refers to the price difference caused by the fluctuations in the exchange rates between different currencies and the differences in the timing of buying and selling.

Interest rate spread refers to the difference between the benchmark interest rates of various countries.

For example, if the fixed deposit interest rate in Taiwan is 2% and the fixed deposit interest rate in the United States is 5%, the 3% interest rate difference represents the potential profit.

However, this 3% profit is not guaranteed. In forex trading, in addition to considering the interest rate differential between currencies, one must also cautiously deal with exchange rate fluctuation risks to prevent the situation of 'earning the interest differential but losing on the exchange difference'.

For example, if 33 TWD is exchanged for 1 USD, due to exchange rate fluctuations, when exchanging the USD back to TWD, only 30 TWD is received. Even if a 5% interest on USD is earned, there may still be an overall loss due to exchange rate volatility.

Therefore, before starting forex trading, it is necessary to clarify the investment objectives: whether to pursue higher interest income during the holding period or to hope to profit from short-term price differences. At the same time, a comprehensive assessment of the relevant risks is required to develop a more complete trading strategy.

Three Major Methods of Foreign Currency Investment: Features and Applicable Groups

In Taiwan, there are generally three main investment methods for investing in forex: foreign currency time deposits, foreign currency funds, and forex margin trading.

| Investment Method | Foreign Currency Time Deposit | Foreign Currency Fund | Forex Margin | Digital Currency Trading Platform | |---------|---------|---------|----------|----------------| | Investment Channels | Bank | Bank/Brokerage/Fund Company | Forex Platform | Digital Asset Trading Platform | | Leverage | None | Low | High | Adjustable (0-100 times ) | | Potential Earnings | Low | Medium | High | High | | Suitable Audience | Beginners | Beginners & Experienced | Experienced Investors | High-Risk Tolerant Investors | | Investment Purpose | Earn Profit Margin | Earn Forex Margin | Earn Forex Margin | Asset Diversification Allocation |

foreign currency time deposit: low risk earning interest rate spread

Forex beginners are suitable to start with fixed deposits, which is the most basic low-risk investment method, primarily aimed at obtaining the fixed deposit interest offered by banks.

If you already have a foreign currency account, you can deposit directly; if not, you need to go to the bank to open a foreign currency account. As long as you are over 20 years old and bring the relevant documents, you can process it.

Investment Features: Foreign currency time deposits have lower liquidity. If the exchange rate has reached an ideal level but the time deposit period has not yet ended, early termination will result in interest deductions. If only placing funds in a demand deposit, the interest rate will be too low; therefore, investors with more flexible needs may consider money market funds.

Forex Fund: Flexibly Earn Exchange Rate Differences and Dividends

Foreign currency funds are very suitable for investors who need to operate funds flexibly. They do not require a contract and can be bought and sold at any time, with interest typically ranging between savings account interest and fixed deposit interest.

Investors can directly invest using New Taiwan Dollars, which are exchanged by the fund company on their behalf, with the main returns coming from interest income and exchange rate differences.

Common Forex Fund Types:

1. Money Market Fund: Such as UBS ( Luxembourg ) Dollar Fund, which invests in dollar-related products, with management and custody fees of about 0.5%, and can be purchased through banks or fund companies.

2. Currency ETF: Such as Yuanta US Dollar Index ETF (00682U), which tracks the price trend of the US Dollar Index, with a management fee and custody fee of about 0.6%, and can be purchased through brokers or fund companies.

For investors with prior investment experience seeking higher returns, forex margin trading may be more suitable.

forex margin trading: high leverage to earn exchange rate differences

The main purpose of forex margin trading is to earn exchange rate differences rather than interest. Due to the lower volatility of forex currencies, leverage is typically used at 50-200 times.

This trading method is similar to stock trading, requiring the analysis of currency price trends (fundamental or technical analysis) to choose the appropriate timing for trading. The difference is that forex margin trading is more flexible, allowing for 24-hour trading, using a T+0 trading mechanism, and has a low entry threshold, allowing global currency pairs to be traded through online platforms with only a small amount of margin.

Risk Warning: Margin trading carries leverage risks, and investors should reasonably choose leverage multiples to avoid using excessively high leverage. The Australian ASIC regulatory authority recommends that the leverage multiple for major forex currency pairs should be below 30 times. Choosing the right timing for trading is also important; it is best to enter at the beginning of a trend and avoid ineffective fluctuating markets.

Why should foreign currency investments be allocated?

• Low Investment Threshold: Investing in forex is easy to get started, and forex accounts can be opened at bank counters or via apps, making the application process convenient. Once the account is opened, you can begin buying and selling forex.

• Risk Diversification: From the perspective of asset allocation, if all assets are valued in a single currency, it will face exchange rate risk. When the domestic currency depreciates significantly, it may lead to a reduction in wealth, similar to how the Ukrainian currency (UAH) almost lost its value after the Russia-Ukraine conflict, while the Russian Ruble (RUB), despite having an exchange rate, is difficult to exchange. Based on risk diversification considerations, allocating a certain proportion of foreign currency assets is a wise move.

• High Market Transparency: Forex trading is fairer than stock trading, with participants from all over the world, making it difficult to manipulate the trend of a particular currency. From a certain perspective, it is fairer than stock trading.

• Flexible Trading Hours: The forex market is one of the largest financial markets in the world, offering 24-hour trading, allowing investors to exit positions whenever they find prices unfavorable. In contrast, the stock market is limited by fixed trading hours.

Forex Classification and Investment Focus

Taiwanese people love foreign currency investments for a reason, mainly because Taiwan's interest rates have been low for a long time, while foreign currency interest rates are relatively high, creating a interest rate spread between the local currency and foreign currencies, attracting investors to exchange New Taiwan Dollars for foreign currencies to gain the interest rate spread.

Taiwan banks typically offer 12 major forex for investment, including USD, AUD, CAD, HKD, GBP, CHF, JPY, EUR, NZD, SGD, ZAR, and SEK. These are also the most influential currencies in the world.

These foreign currencies can be divided into four main categories based on the key factors affecting exchange rates. When investing in different types of coins, it is important to pay attention to different elements:

1. Policy-based coin

Policy-based currencies are those whose exchange rates are primarily influenced by policy, represented by the US dollar and the euro. The trends of these currencies are highly correlated with central bank monetary policy, QE, or interest rate cuts. When central banks implement loose policies, exchange rates usually decline; when they implement tight policies, exchange rates often rise. When investing in such currencies, special attention must be paid to the timing and content of central bank policy announcements.

2. Safe-haven currency

Mainly includes the Japanese Yen and Swiss Franc. The characteristics of these two countries are economic stability, mature development, and stable political situations, with central banks rarely adjusting interest rates. Due to the relatively low correlation of their economies with the global economy, when global situations are turbulent or the economy worsens, investors often buy these currencies for hedging, or even borrow these currencies for arbitrage, waiting for the economy to improve before converting back to their local currencies, while earning exchange rate differences and interest rate spreads.

3. Product-type coin

Refers to the national currencies of countries that mainly rely on the export of commodities as their primary economic source, such as the Australian dollar and the Canadian dollar. These countries primarily export commodities, and when commodity prices rise, other countries need more of that country's currency to purchase an equivalent quantity of goods, thereby increasing that country's exchange rate, and vice versa.

For example, Australia is the largest exporter of iron ore in the world. When the price of iron ore declines, the Australian dollar exchange rate (AUD/USD) will also depreciate.

Between 2021 and 2024, the price of iron ore fell, and the Australian dollar exchange rate also decreased. For beginners in forex trading, commodity currencies (such as the Australian dollar) are easier to get started with, as their price movements are easier to grasp. Through strategies like trend trading and day trading, investors can achieve considerable returns in the forex market.

4. Emerging Market Currencies

Mainly refers to currencies from economically developing regions, such as the Chinese Yuan and South African Rand. These countries are in a phase of rapid development, and interest rates are usually higher. The investment in these types of currencies is primarily to earn high interest rate differentials. However, due to the potentially unstable political and economic environment in these countries, investors need to be aware of the risks brought by policy changes.

Forex Investment and Digital Asset Allocation Strategies

With the development of financial technology, many investors have begun to combine foreign currency investments with digital asset allocations. Mainstream digital asset trading platforms have provided trading pairs between foreign currencies and digital coins, allowing investors to allocate their assets more flexibly.

Advantages of Forex and Digital Asset Allocation:

1. Diversify Investment Risks: By allocating both fiat currency and digital assets simultaneously, reduce the risks of a single asset class.
2. Increase Asset Liquidity: The digital asset market operates around the clock, enhancing the flexibility of asset allocation.
3. Hedging against inflation risk: Certain digital assets can serve as tools to combat inflation of fiat currency.

Investment Advice:

• Beginner investors can start with low-risk foreign currency time deposits to familiarize themselves with the forex market operations.
• After gaining some experience, you can try forex funds or ETFs to increase your earning potential.
• Investors with a higher risk tolerance may consider allocating part of their funds for forex margin trading on professional trading platforms.
• Build a diversified investment portfolio, reasonably allocate the proportion of fiat currency and digital assets.

When investing in forex, one should fully understand the economic policies of various countries, interest rate trends, and global market dynamics, and develop an investment strategy that aligns with one's risk tolerance in order to achieve stable returns in the international financial market.

Forex Investment Risk Management

Investing in forex has many advantages, but there are also significant risks that cannot be ignored. Effective risk management strategies can help investors avoid substantial losses:

1. Exchange Rate Risk Control: Set reasonable stop-loss points to prevent significant exchange rate fluctuations from causing asset depreciation.
2. Diversify Investment Coins: Do not concentrate funds in a single currency to reduce the risks brought by policy changes in specific countries.
3. Pay attention to economic indicators: Regularly track the release of economic data from various countries, including GDP, employment rate, inflation rate, and other key indicators.
4. Moderate Leverage Use: Especially in forex margin trading, control