How Interest from Your Foreign Currency Fixed Deposit Affects Your Returns

Over the last couple of days while turning the idea over in my head of opening a foreign currency fixed deposit account, I’ve been looking up interest rates quite voraciously. To my surprise, and disbelief, the US dollar (US$), the Euro (€) and a couple others have such low interest rates that I’m wondering why anyone would want to open such an account with any of our local banks in the first place. Also, when coupled with the FOREX risk involved (refer to The Risk of Foreign Currency Fixed Deposits for a discussion on FOREX Fixed Deposits risks), it’s unbelievable anyone would find it worth the gamble.

That said, there was only one currency that stood out in terms of interest rates. The Australian dollar (A$).

Here are some figures pulled out from the relevant banks’ websites to illustrate this.

ICIC bank offers the best interest rates for their fixed deposit account for a 12mth period, with CIMB coming in second. However, CIMB offers more flexible deposit time periods and has the best rates other than the 12mth.

So with such high interest rates does this make it a good investment? Lets see.

Using ICIC bank’s interest rate of 6.59% p.a., a deposit of S$10,000 and an exchange rate of S$1.00 = A$0.90:

Conversion of S$10,000 into A$: S$10,000 = A$9,000

Interest gained after 1 year: A$9,000 x 6.59% = A$593.10

Total amount: A$9,000 + A$593.10 = A$9,593.10

Looks like a gain doesn’t it? But unfortunately, this doesn’t take into account foreign exchange risks. Take a look at these points.

1) If rates remain the same after a year, then converting A$9593.10 back into S$ will give us a total of S$10,659, a gain of S$659 or 6.59% as promised by the bank.

2) However, should the S$ rise in strength against the A$, a 10cent move upwards (i.e. S$1.00 = A$1.00) will result in your investment now being worth only S$9,593.10 or a 4% net loss of S$406.90 despite the interest paid.

3) On the flipside, a 10cent move downwards where S$1.00 = A$0.80, will result in your investment now being worth S$11,991.37. A nifty gain of almost $2000 or 20% profit.

If you’re a person who thinks that the upside must be twice that of the downside, then perhaps this investment might be something to put on your radar. However, do also consider the minimum investment amount and the buy/sell spread which I didn't mention. These vary from bank to bank. 

For me, I doubt I’ll be opening an account any time soon, at least not till I’ve set my other investment plans in motion. But once I do, I'll definitely consider this.

Cheerios!

~K