Investing off shore helps to spread risk.
Investors can reduce their currency risk by hedging with currency futures. Investing offshore helps to spread risk because not all markets around the world move in the same direction at the same time.
Diversification between markets offers the opportunity to reduce risk and improve return, however, along with this opportunity
comes the risk associated with fluctuations in exchange rates.
These fluctuations have a direct effect on the value of investments. If you have investments in Australia which are producing a good return and the value of the New Zealand dollar increases with respect to the Australian dollar, then the value of your Australian investments, when converted to New Zealand dollars, will fall, thus reducing the total return on your investment.
Of course, the opposite can also be true and returns can be enhanced if the New Zealand dollar falls in value.
Predicting exchange rates in the short term is by no means an easy feat because there are so many variables at play.
