Foreign Currency Time Deposit/Fixed Deposits

Interest rate for Singapore dollar fixed deposit/time deposit for a year tenor is 0.25% per annum (Source: OCBC)

Interest rates for different foreign currency time deposits (using same amount S$50,000 and one year tenor) are:

Australian dollar: 4.025%
New Zealand dollar:  2.75%
Chinese Yuan offshore: 2.1%
US dollar: 0.3875%

Interest rates of these foreign currency time deposits are higher than Singapore’s.

When placing money in foreign currency deposits, one must NOT decide on the currency based purely on interest rate it offers. You have to consider the foreign exchange appreciation or depreciation relative to Singapore dollar when the time deposit matures in the future. This is the hardest part of decision making. It will require you to form an opinion on the foreign currency in the future. Your interest earned for the one-year duration could easily be wiped out by foreign currency exchange rate loss.

By way of illustration, say you place S$50,000 in Chinese Yuan offshore (CNH) time deposit and the bank quotes you a currency sell rate of 0.2024, you would have placed CNH 247,035.57 for one year at 2.1% p.a. interest.

Interest to be earned in one year will be CNH 5,259.80. Total principal and interest comes to CNH 252,295.37.

Assuming, Chinese Yuan offshore weakens against Singapore dollar and the exchange rate is 0.196557 in one year later, your total principal and interest will become S$49,590.42. This is lower than initial S$50,000 invested. You will do well if the exchange rate remains at 0.2024 or higher.

Take note that the bank has a sell rate and a buy rate for each foreign currency. The bank earns on the spread between these two rates. In the case of Chinese Yuan offshore, the sell and buy rates are 0.203357 and 0.196557 respectively. So on first day of placing the time deposit, your deposit has a lower value on paper straight away, and this has nothing to do with currency fluctuation.

Copyright © 2012, limkimtong for Living Investment

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.

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