Someone commented that the interest rates for AUD & NZD are higher than SGD and asked whether to convert SGD to AUD/NZD and park the money in foreign currency fixed deposits (FCFDs). These are my thoughts.
AUD/NZD have appreciated sharply against the SGD since the beginning of the year because of 2 reasons:
(1) Interest rate hikes by central banks
Their respective central banks (equivalent of our MAS) have raised domestic interest rates to curb rising inflation. In layman speak, prices are spiralling upwards, central banks step in and raise interest rates, making it more expensive to borrow money to acquire assets.
(2) Yen-carry trade
Investors, Speculators, Bankers etc. are playing the yen-carry trade game, basically borrowing cheap yen or other low interest-rate yielding currencies (SGD and SFR) to invest in higher yielding currencies (e.g. AUD/NZD). Both reasons drive demand for AUD/NZD, hence causing them to appreciate against other major currencies.
The yen-carry trade has continued for several years and estimated at a few hundred billion USD (that’s 11 zeroes). Some economists have commented that we are at the last leg of this game and the yen-carry trade will unwind soon. Once the Bank of Japan (BoJ) raise interest rates, JPY will strengthen causing a huge scramble to switch from AUD/NZD back to JPY. AUD/NZD will depreciate against major currencies, some say sharply. What goes up eventually comes down.
Hence, in my opinion, it is a little late to buy AUD/NZD unless you can stomach the FX fluctuations which can potentially wipe out any spreads on interest rates i.e. 8% NZD vs. 0.5% JPY.
This is the FX conversion chart between the NZD/SGD and USD/JPY since 1/1/07. The numbers speak for themselves.
Hi is it a good or bad idea to borrow money from a Japan Bank and tranfer to NZ Bank? Japan has very low interest rates for borrowing.
Yes, it is generally (STRESS: generally) a good idea to borrow in JPY and invest in higher-yielding currencies like AUD or NZD and ride on the “yen carrytrade” wave.
However, you need to be very nimble as the unfolding of the yen carrytrade can lead to severe and painful losses. I know of friends who bought AUD at 7~ish yield 12 months ago and close to par with the USD. Now, AUD hovers around the 3% yield mark and accordingly, its value has depreciated substantially against major currencies like USD and GBP i.e. you would suffer heavy FX losses.
For the long run, my personal view is commodity-backed currencies like AUD and NZD should trend upwards once the bull/boom cycle swings up (perhaps in another few more quarters). If you have kids who plan to study or if you plan to retire in the Southern Hemisphere, then you generally do not have to worry about FX losses.
CAVEAR EMPTOR