Is it time to buy into foreign currencies? - Singapore
Trading money for money has always been a way to make a quick, er, buck. But with the Singdollar strengthening, Michelle Tay examines if the time is right to speculate on money.
Commercial banks do it, central banks do it, multinational corporations and even governments do it. Foreign exchange (forex) trading, of course.
The forex market gauges the strengths and weaknesses of countries’ economies, making it well-suited for retail investors.
With only a dozen major currency pairs to study, anyone who follows the news can start trading based on familiar statistics like interest rates and employment data.
Average daily trade in the global forex and related markets is estimated at more than US$3 trillion (S$4.1 trillion).
Currency markets have weak correlations to stock and bond markets, hence their growing popularity among retail investors as a way to diversify portfolios.
However, forex trading, like other forms of investment, involves a substantial risk of loss.
There are two ways to get returns from using your Singapore dollars to buy other currencies.
First, you make money if the other currency appreciates at a faster pace than the Singdollar. The problem? The Singdollar is strengthening against many currencies, and is likely to continue doing so, as the Monetary Authority of Singapore plans to allow the local unit to strengthen to fight inflation. This makes it harder to find currencies that can outpace the Singdollar.
You can also invest in ‘high-yield’ currencies in countries that offer relatively high interest rates on deposits. Currently, these include Australia and New Zealand. You can buy foreign currency deposits at any local or foreign bank.
Savvier investors can consider dual-currency premium accounts. With these accounts, the bank can repay your principal and interest earned in either the base currency (the one in which your initial investment was made) or the alternate currency.
Currency-linked structured products are another possibility. With these, you bet that a currency will either rise above or stay at the pre-set price, or strike price, at a specific point in time.
If you’re right, you will get your principal back and earn a pre-set rate of interest that is usually higher than the time deposit rate. If you’re wrong and the currency falls below the strike price, you might still be able to recover the principal and interest ? but they will be calculated based on the linked currency at the strike price, which usually means a loss for you.
The Sunday Times spoke to currency experts and financial advisers to find out which currencies are good and bad bets this year.
Source : Straits Times - 04 May 2008
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