Imagine that you put your money in Australian fixed deposit a month ago, you would have realised that your holding in Australian dollars would have depreciated against Singapore dollars by 7.5% in a span of 1 month.
During the period of just one month, the Australian dollar has moved down significantly from S$1.29:A$1 to S$1.19:A$1 due to worries of poor economy of Australia. The Reserve Bank of Australia has cut its key interest rate by 0.25% to 7% on Tuesday, the first time in over six-and-half years. This brought down the Australian dollar to its current position.
If you place S$300,000 in Australian dollar deposit hoping to earn higher interest like 6.5% per annum, you will be sitting on a paper loss of S$22,500 on the capital value when converted back to Singapore dollar. This will wipe out your interest to be earned many folds on a month basis. The worry is whether the Australian dollar will drop further which will make situation worse. Should your stay the course and wait for maturity of fixed deposit or to cash out and cut your loss?
You then sought advice of your relationship manager of the bank who sold you the investment product. More often, he or she will be unable to allay your fears. They would tell you that 1000 basis points drop in Australian dollar was wholly unexpected. This is cold comfort when your investment had dropped so much. Wealth manager performed well when the goings is good when economy is great. Once there is slow economic growth like now, it is harder to recommend investment products that can beat the market. Good relationship skills become crucial to maintain their clientele.
Written on 9/3/2008 9:28 PM
Copyright © 2008, the author known as LKT in Singapore.
The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.