Currency-linked Investment – Aussie dollar slumps

Australian dollar was a problem for me in 2013.

In February, I invested in currency-linked investment (CLI) using Singapore dollar (S$) with alternative currency of Australian dollar (A$) at strike rate of S$1.2720 to A$1. Interest earned on this CLI was 3.25% per annum.

The table shows the transactions for the rest of the year.

Date A$ to S$ Interest rate Remarks
13 Feb 1.2720 3.25% Interest earned in S$
13 Mar 1.2730 3.40% Interest earned in S$
18 Apr 1.2750 3.25% Interest earned and converted to A$
20 May 1.2097 2.245% Interest earned in A$
20 June 1.1678 2.275% Interest earned in A$
22 July 1.1536 2.305% Interest earned in A$
22 Aug 1.1445 2.065% Interest earned in A$
23 Sep 1.1676 2.065% Interest earned in A$
23 Oct 1.1737 2.105% Interest earned in A$
25 Nov 1.1347 2.125% Interest earned in A$

There was no conversion to A$ for three months and the investment remained in S$ and S$ interest was earned for the period. The S$ investment was finally converted to A$ at rate of 1.2750 on 20 May when A$ started to weaken.

Since May, A$ continued to weaken against S$ starting from 1.2750 to currently at 1.1299. The decline in A$ was a hefty 1450 basis points, which translated to 11.3% drop!

No amount of interest earned in S$ and A$ can cover this decline in foreign currency value of my investment. The initial investment lost 10.8% from cost. With hind sight, it was better not to get into A$ CLI for this year.

This decline in A$ was mainly due to the economy of Australia. Economy slowed significantly this year and the Reserve Bank of Australia had been cutting interest rates to boost economic growth (now at 2.50% cash rate). It did not help when the central bank governor kept talking down the A$ and this sent investors off investing in A$.

Copyright © 2013, 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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