Currency Hedging your portfolio: a tool to add value or remove risk?

Every Australian investor who buys an unhedged global equity Fund is making two bets whether they realise it or not. A bet on the underlying shares, and a bet on the Australian dollar. Currency hedging strips out the second bet but removing risk and removing return are not the same, and the difference matters now more than ever.

The mechanics of currency hedging

Currency hedging a portfolio usually involves forward FX contracts to offset the foreign currency movement embedded in an underlying exposure, so the portfolio's provides returns in the local currency rather than in AUD terms. It converts currency risk into a interest rate differential cost (or benefit), priced through the forward market via covered interest rate parity. The hedging broadly costs (or pays) the gap between AUD and USD interest rates. Currently, that gap is positive and it has just moved.

The US Federal Reserve delivered its first rate hike since 2023 yesterday. Lifting the federal funds target range to 3.75–4.00%, while the RBA has held its cash rate at 4.35% since August, with its next decision due 29 September.

Source: Bloomberg September 2026

For much of the past three years, US rates ran well above Australian rates, making hedged share classes a persistent drag relative to unhedged ones. That gap has now narrowed to the point where the differential runs marginally in Australia's favour. A meaningfully different backdrop to the one that shaped investor thinking on hedging in the past few years.

Short term vs medium term

Over short horizons, currency moves can swamp the underlying equity return in either direction. A strong AUD quarter can erase a strong US equity quarter, and vice versa.

Source: Bloomberg September 2026. Past performance is not indicative of future performance.

Over medium to long horizons, the academic and practitioner consensus is less about direction and more about volatility. Hedging tends to reduce the standard deviation of returns for an AUD based investor holding foreign assets, without a reliable, persistent return advantage in either direction. Whatever excess return shows up from hedging over time is mostly the interest rate differential playing out. A known, explainable factor, not a hidden source of skill.

What history shows

AUD/USD has moved through wide cycles over the past two decades. Well above parity during the mining boom, to the high $0.50s during risk off periods, and a broad recovery since.

Source: Bloomberg September 2026

The currency has historically behaved as a risk barometer. It tends to weaken when global growth or risk appetite deteriorates and firm when it improves, partly reflecting Australia's commodity exposure. That's the historical pattern hedging decisions get built around.