41

As everyone knows, the ruble is falling compared to the euro and it has been falling for a long time already.

The way I see it, the ruble will eventually get back up once the political situation around it is resolved. Is it naive to think I can just exchange - say, 500€ - for its equivalent in rubles, wait until the currency is back on its feet and then exchange it back now that it will return me more euros for the same amount of rubles?

For example, if I use €500 today and exchange it for rubles at today's rate (0.01349) I receive 37064.5 rubles (74.1290 * 500).

Taking the rate of about 2 years ago on March 12 2013, we see an exchange rate of 0.02500. That would mean I get €1 for every 40 rubles, resulting in a total of €926.6125 (37064.5 / 40).

Aside from the fact that you don't have access to your €500 in that period, is there any reason why someone shouldn't buy a cheap currency of an economy that's bound to bounce back?

Edit to address a common remark:

Isn't there a significant difference if you look at it from a short term vs a long term perspective? I would think that many companies with rubles step away from it so they don't endanger their operations with a shortage of money or being forced to lend more money (and as such incur interest rates).

Myself, on the other hand, can wait for years since it is "extra" money and I am not bound to the weak currency.

Does this lower currency rate really indicate that experts don't see much value in the ruble in the long term?

Jeroen Vannevel
  • 513
  • 1
  • 4
  • 8
  • 2
    FX forward rate are a good method for figuring out what the market thinks the value of currencies will be in the long term. For instance, asof 1/7, the one year forward exchange rate for EURRUB is ~90, significantly weaker than the current value. – rhaskett Jan 08 '15 at 01:11
  • 22
    "once the political situation around it is resolved" +1 for your optimism, at least. The main problem here is that foreign currency exchange rates aren't bound by the relationship "what goes up must come down" - and what goes down doesn't necessarily ever need to come up again. It doesn't necessarily need to ever (or at least in one human life time) go significantly back up, and could keep going lower for an unbounded period of time. Indeed, if the governments involved want a cheap ruble (it does make exporting easier) it could just keep on going down for a really long time. – BrianH Jan 08 '15 at 03:40
  • 27
    Did you just call Russia "an otherwise solid economy"???? Have you ever been to Russia? – littleadv Jan 08 '15 at 04:17
  • 7
    Even if you're confident that the economy will eventually recover, there is the risk that the government prints lots of money during the crisis, causing severe inflation. – CodesInChaos Jan 08 '15 at 15:19
  • This question exactly describes the process I go through with Dogecoin/Bitcoin. In my experience, it's feasible as long as the gains would exceed any transaction fees. – Corey Ogburn Jan 08 '15 at 19:59
  • 3
    One thing to consider is the opportunity cost of investing your €500 in a "safer" investment vehicle. You are currently comparing the FX trade with sticking €500 under your mattress. If you have a long term time horizon you could presumably invest your money some other way and also make a return. You'd then need to compare the potential risk and reward profiles. – Daniel Kelley Jan 09 '15 at 09:13
  • I see a great mismatch between your question title and body. Are you going to fix it? –  Jan 13 '15 at 07:35
  • You're trying to "beat the market" and I'm only aware of three ways (aside pure luck) to do this: 1. Be smarter than the market. 2. Be faster than everyone else. 3. Cheat. You may decide for yourself which of those options applies to you. – Thomas Jun 27 '19 at 09:39

12 Answers12

47

Many people make money doing this kind of thing. Many more people lose money doing this kind of thing. You're basically making a bet that the market is wrong. What makes you believe that this particular currency will increase in value compared to your home currency?

The other problem with this kind of bet is that it's expensive. You will need at least around a 6% windfall just to break even due to the small scale nature of the currency conversion (buying and selling in a foreign currency will usually incur a 2-3% transaction cost each way).

It's usually a much better idea to invest in the currency of the area you live in as you will be spending your money in this currency.

EDIT: Oh and the ruble won't go up until the oil price does or there is a change in leadership. Neither look likely in the medium term future at this stage.

Stephen
  • 2,529
  • 2
  • 11
  • 7
  • 2
    Wouldn't the high interest rate from the russian central bank more than offset the transaction cost? Even if you choose to speculate in the ruble I would not think that keeping the ruble in your matress would be a good idea. – Taemyr Jan 08 '15 at 15:18
  • 1
    The key phrase you used was "as I see it". This is why this is speculation, not an investment. Buy an asset that produces an income stream instead. – JAGAnalyst Jan 08 '15 at 18:14
  • There are much more efficient ways to achieve this. Given the liquidity and low volatility associated with currency trading. Trading platforms exist to relatively inexpensively leverage (borrow) huge positions. Google "Fx Trading Platform", typically they will cost a few pips as opposed to a few percent in spread. However, as Stephen said, its much easier to lose money than make money. – Aron Jan 09 '15 at 01:55
  • @Taemyr How does one go about depositing their rubles with the Russian Central Bank so as to receive those interest rates? And if you do deposit it somewhere, now you have two risks instead of one, no? –  Jan 09 '15 at 19:14

  • "buying and selling in a foreign currency will usually incur a 2-3% transaction cost each way". Stock exchanges traditionally offer very small spreads.

     – Ark-kun Jan 09 '15 at 22:46
  • @Michael Normal people cannot work with the Russian Central Bank (just link with Federal Reserve in US). But there are other banks giving very high rates (even in USD) right now. Most of the banks are part of the deposit insurance program, so the deposits are safe (up to ~$20000). – Ark-kun Jan 09 '15 at 22:50
  • 1
    should also mention the barrier to entry, my broker requires a minimum deposit of $10K to open a currency exchange account. – SnakeDoc Jan 09 '15 at 23:09
  • FXCM required a very small deposit if I recall correctly. They allow betting on the USD/RUB pair. – Mark K Cowan Jan 11 '15 at 17:50
  • It's even worse than you point out. You need ~6% windfall to cover the costs, but that's only if the windfall occurs almost immediately. Opportunity costs mean that, if you hold on to the Roubles for several months/years waiting for the exchange rate, you're going to need much more than 6% to make it worth your time. It also requires considerably more time/effort than many safer forms of investment. – Scott Jan 12 '15 at 03:39
35

What you are describing is a speculation. Particularly, a long-term speculation. You propose to place a bet that:

  1. Your particular view of the fundamentals is correct (which it might be)
  2. Whatever shorter-term dislocations that cause major market players to price the ruble differently from how they otherwise would are bound to change within your investment horizon (which might happen).

But as with all bets, it's better to know, which, for a person like you or me, is kind of problematic.

For example, my wife works in a bank, doing finance, and I myself sort of look at the market, then this happened:

Enter image description here

... Did we see the spike coming? No, we did not. We saw only the general trend, and even that not to real numbers. Can we explain that spike? Well, "some sort of fishy stuff is going on" is my best answer. Last time some big and fishy stuff was going on, the oil was up to US$140 a barrel and then down to almost US$30. The big boys were fighting and some of them blew up.

I'd say that betting on the ruble before whatever thing is going to happen in the West is resolved might be a risky business. And I live in Russia. And I watch things. And I don't really know. What I do know, last time both the ruble and Russian stock market went up after the game in the West was resolved, with exactly zero change of economy or political leadership, so the change of either of that is not strictly required.

Another point is not to hold paper money long-term. I am not sure if you assumed holding paper or having a bank account paying up to 20% yearly (in rubles they do).

With the way this question was asked, my guess is that you are new to this; your best bet would be education. Not necessarily a formal education, self-education will do. Do some research. Make some decisions. Write them down or execute them on some small scale (maybe 500€ is a small enough scale for you; I recall losing real money helps memory and motivation somewhat), then wait and observe. Meanwhile, get good at your primary job.

Jacob Bundgaard
  • 143
  • 6
Eugene Ryabtsev
  • 487
  • 3
  • 8
15

Currency trading is basically a zero-sum game. You're betting against the experts that play the game. Why do you think you're better than they are? Especially with the overhead costs you must deal with, being average still means you lose.

Loren Pechtel
  • 5,068
  • 1
  • 21
  • 20
  • 1
  • I would not call currency trading a game. Currencies are much more more massive than stocks and central banks have lots of money. It's not that easy for "experts" to play the currencies. 2) Like with stock exchanges, the overhead costs are minimal.
    • – Ark-kun Jan 09 '15 at 19:15
  • 1
    "You're betting against the experts" and you're not in the stock market (depending on your strategy of course)? – SnakeDoc Jan 09 '15 at 23:10
  • 2
    "Zero-sum game". Sorry but that is so utterly wrong. If it were the case money would be worth the paper its printed on. – Aron Jan 12 '15 at 05:53
  • @SnakeDoc The stock market as a whole goes up. Thus so long as you don't buy trash it will go up in time. Currency trading is another matter, there's no underlying source of gain. – Loren Pechtel Jan 12 '15 at 06:56
  • @Aron Why do you say that? – user253751 Mar 30 '17 at 23:32
  • @user20574 The way in which currency exchange is driven, is by economic growth. It is not zero-sum, as that money movement will stimulate growth which causes a feedback. Most people seem to think economies are "zero-sum", but if that were the case, we would still be trading rocks. – Aron Mar 31 '17 at 01:01
  • @Aron Economies are not zero sum--but the currencies don't grow with the economy. In general the central banks specifically seek to avoid this--their job is to grow the money supply at the rate the economy grows so the value of the currency remains constant. – Loren Pechtel Mar 31 '17 at 03:11
  • @LorenPechtel You mean inflation? In my day, you could get a 3 course meal and a helicopter ride for a dollar! – Aron Mar 31 '17 at 03:12
  • @Aron Inflation happens when you increase the money supply faster than the economy grows. – Loren Pechtel Mar 31 '17 at 03:38
  • 1
    Exactly, anyone who bases an investment strategy on 'The way I see it' should realize they are essentially about to take a massive gamble on their gut feeling outperforming a world of market analysis. – Dennis Jaheruddin Jun 28 '19 at 10:13