Our riskiest funds had a good day

Today, we are seeing positive returns on our riskiest investments, despite the market not noticing a super performance. This is mainly due to the dollar effect: the observed dollar increased by 2.81%.

Dollar Return Histogram Observed for the last three years. Source: Own elaboration with data from the Central Bank of Chile

But why does the appreciation of the dollar make my investments go up, if I invested in Chilean pesos?

You might think that the rise in the dollar is a return that has nothing to do with the investments in funds made in Chilean pesos, but that is not the case at all. If the funds you invested in invest the money in foreign assets, we convert the Chilean pesos into dollars to buy them, and the exchange rate becomes one more variable to consider in profitability. So if the dollar rises, the same investment equals more Chilean pesos.

And what is this increase due to?

Speaking today, James Bullard, president of the St. Louis Fed, said he believes policy rates should continue to rise (5% to 5.25%), which is more than the market I expected. He says the Fed’s rate hikes have so far had a limited effect on perceived inflation and that further hikes are needed to cool the market.

This is causing the market to revise expectations for US Treasury yields upwards, making low-risk assets more attractive. Because it is more attractive, more investors invest in this type of asset and the demand for the US currency (and therefore its price) increases.

In addition, copper registered a price drop. This is because China is increasing the number of Covid-19 contamination levels, which suggests that the restrictive measures to fight the virus will increase and they will demand less of the raw material.

The fall in the copper price usually causes the dollar to rise: Chile exports copper and sells it in dollars; When the price falls, fewer dollars enter our economy and the currency becomes more valuable. Its price goes up.

What do I do with my investments after this kind of news?

That investments rent out positively is always good news.

But is it a reason to change an investment decision?

The truth is that there is news every day and there are too many factors that are going to influence investments; so many that they are impossible to predict.

For this reason, it is best to normalize the news that causes price volatility, good or bad, and trust that the economy will grow on average over the long term and have a positive return.

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