After watching the euro march steadily higher against the renminbi and US dollar between 2005 and 2008, an increasing number of people started stockpiling cash in euros, even when they had no practical use for the currency. This strategy looked great… until the euro fell almost 20% in 3 months against both currencies. Here we are about 2 years later, and rates are close to the same levels they were in October 2008.
Numerous academic and empirical studies have shown that it is impossible to reliably predict currency movements. As Nassim Taleb touches upon in his book “The Black Swan,” financial markets oftentimes move in directions that no one anticipates. For all the logic behind why a currency or investment should move in one direction, there is a multitude of unknown variables that could be more relevant in determining what actually transpires.
This means that moving cash around based on where you think exchange rates are headed is nothing more than gambling. Even if you feel certain about future exchange rate movements, there is a chance that things might not play out as everyone expects.
If you know you are going to be living in China for the next couple months or years, then you know that you will have expenses in renminbi. Everyone here should have at least some cash in renminbi for monthly living expenses as well as a portion for your emergency funds. If you plan to be in China permanently (i.e. through retirement), your portfolio should reflect the greater need for renminbi assets; however, keep in mind that the renminbi is still a capital controlled currency, and that China’s economy has its fair share of risks to consider. Don’t put all your eggs in one basket.
As interest rates have gone lower, it may be tempting to put money into currencies with higher interest rates. However, foreign exchange movements against you could easily dwarf the extra interest you are reaching for. The best way to manage your cash savings is to address currency risk and hold your cash in currencies that you have a practical use for, now and/or in the future.
Dealing with multiple currencies creates some differences compared to living back home, but the underlying principle should be familiar: adequately address the risks you face. This is an important consideration regardless of where you live.