Some interesting currency moves today

[Wd40]

Atleast CPF gives you decent returns, but those of us who don't have that privilege/burden(depending on how you see it) and still hold SGD lying in banks with 0.1% interest, is not very clever. Especially if your home currency is a high yielding currency.

Well in theory if you made (just say) 11%pa with an INR depo account, and 1%pa with a SGD account, that is because those rates have been derived against the expected future values of those currencies. Broadly speaking (very) the valuation models are indicating that the INR will depreciate 10% (11-1%) vs SGD over the course of the year ahead. So, net net what you end up with after one year is the same.

This is only partly true. I made another post explaining how it is profitable to convert to INR:
http://forum.singaporeexpats.com/viewto ... 9&start=15

Basically interest rates of different countries are set due to various factors like inflation, growth rate, exchange rate volatility etc.

In India's case our growth rate is so high, in 2 years we will exceed China as China is slowing down to less than 7% and we will exceed them. With high growth come high inflation and inorder to tame it you need to set interest rates high.

[JR8]

This is only partly true. I made another post explaining how it is profitable to convert to INR:
http://forum.singaporeexpats.com/viewto ... 9&start=15

I think you made a post how in one highly specific example it could be profitable; after all you wrote 'Now the next 5 years, my bet is INR is most likely going to outperform the SGD'. And that's the issue, if you've saved the money to buy your first home (arguably the financial foundation of your future adult life) the last thing you want to rely upon is a 'bet'.

Forward FX rates (and the interest rate expectations that they're derived from) are calculated from the 'money on the table' consensus opinion of the market participants. It's a bold and brave man who goes against such a tide.

[Wd40]

This is only partly true. I made another post explaining how it is profitable to convert to INR:
http://forum.singaporeexpats.com/viewto ... 9&start=15

I think you made a post how in one highly specific example it could be profitable; after all you wrote 'Now the next 5 years, my bet is INR is most likely going to outperform the SGD'. And that's the issue, if you've saved the money to buy your first home (arguably the financial foundation of your future adult life) the last thing you want to rely upon is a 'bet'.

Forward FX rates (and the interest rate expectations that they're derived from) are calculated from the 'money on the table' consensus opinion of the market participants. It's a bold and brave man who goes against such a tide.

I am talking as an Indian foreigner working in Singapore and making the best use of our disposable income. That home you are talking will be in India. So, the safer option is to convert to INR and then even if INR depreciates, it doesnt matter as much as the opposite scenario where SGD depreciates.

Also the example I gave is one of the most conservative. If you take any other period INR investment trumps SGD handsdown.

[JR8]

Also the example I gave is one of the most conservative. If you take any other period INR investment trumps SGD handsdown.

But can you explain why that is...

[Wd40]

Also the example I gave is one of the most conservative. If you take any other period INR investment trumps SGD handsdown.

But can you explain why that is...

Mostly down to near 0 interest rates on fixed deposits on SGD. property is the only investment in Singapore that can give you decent returns, now that avenue is also shut.

In simple terms carry trade. Have a look at this link about the popular carry trades:

http://forexop.com/carry-trade-currency-pairs/

The SGD is used as short against most currencies. The only currency against which it is long is JPY.

[JR8]

Ah yes, that's what George Soros did vs the Pound when the BOE sought to defend it's unofficial peg shadowing the German Mark (within the ERM, pre-cursor to the Euro).
http://en.wikipedia.org/wiki/George_Soros
'He is known as "The Man Who Broke the Bank of England" because of his short sale of US$10 billion worth of pounds, giving him a profit of $1 billion during the 1992 Black Wednesday UK currency crisis.'

In any case, the common theme in a net profitable (post all fees etc) Carry Trade seems to be that the value of one of the pair is being managed/protected by it's issuing treasury. In that way as a retail investor you're just doing a 'micro-Soros'. But keep in mind the smaller the trade the higher the relative frictional costs.

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'Real interest rates (adjusted for inflation) are one of the main drivers behind currency movements.

For this reason, currency pairs with carry opportunities often trend strongly in the direction of the interest rate differential. Trending can take place over very long periods of time when the economic backdrop is good and the interest rate expectations are upwards.

The main risk however is that higher yielding currencies are prone to steep and sudden sell-offs when the economic outlook changes or at times of extreme risk aversion.

These sell-offs are known as carry trade liquidation. When you have severe and sudden risk-avoidance, they can quickly turn into full-blown routs. Panic trading sets in and traders all look to unwind their positions at the same time.

Also, keep in mind that movement in carry trade currencies tends to be driven by the same fundamental reasons. What this means is that brutal crashes often impact all carry currencies in lock-step. Because of this, diversification across several pairs doesn’t help in most instances.'
http://forexop.com/carry-trading-primer/
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Well if all the rest hasn't put you off the above might just have!

Trading currency pairs is a curiously Asian habit. I've never met or heard of a man on the street in Europe or the US discussing it. I'd regard it as very highly speculative, i.e. highly risky, and I'd suggest no one put more than a very small fraction of their investment portfolio into it [what I would almost almost categorise as 'fun money' with which to essentially gamble, and not notice losing].

p.s. strange dichotomy in Asia, a fixation with gold (very low risk) and trading currency pairs (very high risk). Few people seem drawn to investing in 'solid but arguably a bit boring' blue-chip stocks. In SG they put their money in property too, but that's a 'managed market'... I wonder if you can spread-bet on the SG property market rising year on year, year after year, esp. in the run-ups to general elections... ?

[Wd40]

Thanks! That was a nice read on George Soros. He also made a killing during the Asian financial crisis. Its amazing how those days we had someone benefiting from crisis like these. But these days, all we hear are stories about how banks/traders lost money by making crazy bets.

Another popular carry trade is the Aussie:
http://www.cnbc.com/id/101912479

I just looked at xe.com AUD/SGD is now 1.1. If the SGD had not fallen so much we would have reached close to parity by now. Beeroclock, would be interested to know, whats your view on this pair.

[JR8]

Thanks! That was a nice read on George Soros. He also made a killing during the Asian financial crisis. Its amazing how those days we had someone benefiting from crisis like these. But these days, all we hear are stories about how banks/traders lost money by making crazy bets.

Yes, he and his hedge fund launched attacks against a couple of 'currency pegs'. He had the scale to cause real carnage, and profit for his fund.

In finance artificial structures can lead to trouble. Just looks at the economic mayhem that the 'PIIGS' (Portugal, Ireland, Italy, Greece, Spain) received by being in the euro. Ireland will probably recover, but I'm not at all sure about the others.
Singapore has a peg too, but against a basket of other currencies. It'd be a brave person who tried to take that out.

Another popular carry trade is the Aussie:
http://www.cnbc.com/id/101912479
I just looked at xe.com AUD/SGD is now 1.1. If the SGD had not fallen so much we would have reached close to parity by now. Beeroclock, would be interested to know, whats your view on this pair.

Back in my day, I remember our corporate Treasurer having a carry-trade between JPY and US$. Presumably 'everyone was doing it' back then. That said it was his job, and he had 'scale/size'. The smaller your capital the more will get raked off in fees/costs. This is why -
- small scale (wider spreads, relatively higher fees)
- active trading (repeated spreads/fees, and good initial decisions not given time to play out)
- more niche/esoteric products (wider spreads and likely fees)

= are a recipe for paying relatively huge fees to the small investor.

All that said, if you were to put a retail carry-trade on I'd be very interested to see the numbers on it, and follow how it goes!

[Wd40]

Yes, I agree with you. I am not going to open an FX account and do a carry trade in the real sense. I will definitely not use leverage. But we could convert our SGD savings to our home currencies which are higher yielding and then open fixed deposits in our home countries. You could then repatriate it back to SGD after a period of time. I have been doing this for the last 5 years and I have been profitable so far.

Singapore banks also offer foreign currency fixed deposits but the interest rates are lower and with the fees, they don't make sense.

On a related note, I just stumbled upon this:

http://www.dbs.com.sg/personal/investme ... nvestments

looks interesting, I am going to study this more.

[Wd40]

Further vindicates my view about the SGD

http://mobile.bloomberg.com/news/2014-1 ... redit.html

[Brah]

So WD, now that you're back, what do you make of the news out of Japan today, that they're back / now in recession? JPY is up to 116, a 7-year low

[Wd40]

The stock markets dont seem to mind it so much, as it only means even more stimulus by BoJ.

http://www.bloomberg.com/news/2014-11-1 ... ction.html

JPY is indeed screwed and so are Japanese consumers.

http://asia.nikkei.com/Politics-Economy ... gher-wages

[Wd40]

Some more USD strength:
SGD 1.3121
AUD 0.8419
EUR 1.231
JPY 119.66

[Brah]

Some more USD strength:
SGD 1.3121
AUD 0.8419
EUR 1.231
JPY 119.66

Holy crap!

USDJPY crossed over to 121, that, if not a blip, is the sign of a big change, some of it good, some not so good.

[Wd40]

Yeah, FX traders must be having a ball out there with this one way move. If I have to bet the next currency to have a big fall is the Aussie. There are talks of a rate cut and their jobless rate is at 11 year high and they are approaching recession.My prediction you will see 0.75 on the Aussie and it will achieve parity with the Sing dollar, just like 2009 when commodities crashed.