Dear Sir,
Currently the FD rates offered by banks in Singapore are 1% or less. I have just opened an Australian Foreign Currency Fixed Deposit that gives me 7+% per annum.
I have no intention to convert the money back to Singapore Dollars in the forseeable future. the money is kept aside for retirement. Would this be a way for Singaporeans to save. Has interest rates in Australia ever gone down to levels similar to Singapore?
REPLY
I suggest that you ask your bank to give this information to you. They have the past record of currency conversion rates and interest rates.
Many people think they can earn over seven percent in NZ or Australian dollars by putting it there. I thought the same too till I have to liquidate it as the NZ dollar is falling. What I realised now is that the exchange rate takes a huge chunk off this interest rate. They take a huge bite when you first convert and take a second big bite when you convert back. The spread is quite wide. So in the end, it is not seven percent but much less. Take this into account and do a preliminary conversion test first to see how much you will actually be getting before opening an account.
ReplyDeleteThe spread is purposely designed to the advantage of the bank. So even when exchange rate is in customer favour (lucky) during conversion, the spread will offset it quite a bit. If unlucky, it will be worse. It's like throwing a loaded dice, the "6" or even "5" will not happen.
ReplyDeleteOf course, when they advertise, they won't mention this even in fine print. They only say "risk" part of which is man-made or rather bank-made.
In the past 1 year up to date, AUD has lost past 30% or so against SGD. The big drop started in mid of 3Q and up-to-date. That means a person who had been lured anytime in the past year by the 7+% AUD deposit has now lost 30% or so in the so-called currency exchange risk. For banks, they calculate the future 'expected change' (prediction) in SGD/AUD to determine how much they will compensate a depositor for different periods. Gaining 7+% or so is no where near losing 30% on paper, up to today. Of course, one can wait with hope that AUD/SGD wil turn in one's favour at the time one needs the money, or at least break even, while losing out S$ that is strengthening slowing. If you are not using AUD to pay for expenditures, then please look at the future direction of exchange rates to decide if foreign currency deposite % is worth it. We can be sure that banks do not engage in activities that lose money. In term of near future, it is possible that AUD may fall further against SGD because AUS economy is commodity-based and the world economy is heading some kind of recession, which reduces the expected demand for AUS commodity exports. Another factor is the state of economic health. Comparing SIN and AUS, where would you place your confidence in short/long term? No one knows the impact of AUS's recent pro-immigration policy on economic downturn.
ReplyDeleteWhen getting involve in FCDs, always have to bear with two variables, foreign exchange risk and interest rate risk,and both don't seem to move together.
ReplyDeleteHowever, if you plan to convert it for the good of future children education or migration purpose, I think it serves the purpose on higher returns(7% + p.a.) as your position now is insulated from exchange risk.
Anyway, if world economy rebounces, (just matter of time), then AUD may appreciate accordingly, then you might recover on the both sides, from paper loss in your currency and interest earning, again, AUD gov't will have new monetary policy to boost international competitiveness again.
It's hard to get perfection from both ends as they are two side of the sword.
Which Singapore Bank pays the highest fixed deposit rate?
ReplyDeleteFind out here.... http://singaporedepositrate.com/