June 28, 2007

Why I never place Foreign Currency Fixed Deposit.

Being in the Foreign exchange business has its own hazard. One of those hazards is that I was often approached by friends who want to know if it is alright for them to buy USD, EUR, AUD or NZD. When they say “buy”, they usually mean through foreign currency deposit (FCD).

I am never a believer in FCD because I always feel that this is a ripped-off by the bank. When you are in the foreign exchange business, you see the absurd amount of money the bank ripped you off by pushing you these products. You can simply replicate the risk and payout by going through the FX market at a “cheaper cost”.

So how you do it? Before I dwell into this, you need to understand what you are “paying”.

When you place a deposit in say USD, you need to buy the USD against the SGD. So say you wanted to do a USD100,000 deposit, you need to buy the USD from the bank. From the screen-capture below, you can see that the bank is selling you the USD at a rate of 1.5445. However, the bank is only willing to buy the USD at 1.5315. The difference is what we call the bid-ask spread. The spread in this instant is 0.0130, or 130 pips as we call it in the FX market. This is very wide, consider the spread in the inter-bank market is only 3 pips, or 0.0003. It may look small, but for every USD100,000, you pay extra S$1,270 more!

In the deposit side, you get an interest rate of 4.745% from the bank, not bad you think, compared to a miserable 0.5% you got from your saving account for SGD.

However, in the interbank market, you should be getting 5.32% from the bank in a 6 month USD deposit (see below). You lost another US$292, or about S$450.

So all in all, you pay S$1,720 extra to the bank!

This is the reason why I never, never place foreign currency FD with the bank, the feeling of being ripped of is too great to be ignored!


Gold Money said...

I like this post didn't know that stuff

子非魚 said...

That's exactly what I just found out last month when being attracted by the bank's high rate of 4-7% when placing to such forex FD compared to usual 2%. Whatever is earned from the interest, would pay to the bank when you sell the currencies back to them. It may not even have enough to cover the selling and buying differences.

Edmund said...

hi hi, im just wondering where did u find the rate of those inter bank?

issit open to the public

icecold1967 said...

Hi Edmund,

Those interbank rates are avaialble from Bloomberg. Unfortuantely, as a retail investor, if you do not subscrible to Bllomberg or Reuters, you may not be able to see it.

However, other source can still be available from the internet, especialy if you go through some brokerage house to trade FX, their platform is the inter-bank rate for FX. Brokerage house like saxo-market or Philip or FXCM all have such FX platform.

Peter said...

I am looking for a Japanese yen (LIBOR Rate) Foreign Currency loan to be colateralized by a strong equity position in a Commercial Real Estate portfolio my firm is consolidating, Please can you put me onto a source for this type of loan. The consolidated loan value is around $250 mil.

icecold1967 said...

Hi Peter,

Yen loan can be taken from any bank in Singapore. You just need to talk to your relationship manager about your requirement and I believe he can work it out. Alternately, you can simply borrow in SGD (if this is what the bank is willing to lend you) and go into a fx derivative to struture the loan as if it is a YEN loan.

Anonymous said...

What would you suggest as a good investment for people with low income? What do you think of fixed deposit in JPY?

icecold1967 said...


1) Well, whether low income or high income is really relative;

2) Standard answer to your question will be to maintain a well diversified portfolio;

3) I am bullish on the Yen on a longer term basis, but whether should you place a YEN deposit depends on your risk appitide and if the deposit makes up a small or large portion of your entire portfolio;

4) I personally continue to favour commodity related investment like metal, food commodities, oil & energy. However, short term wise, a correction may be due in the oil sector, and gold may continue to fall a little but I look to accumulate somewhere between 800-850 level. I also favor real estate in Asia. As usual, please talk to your own financial advisor for further advise....

BP said...


I am a SGD income-earner and want to invest in RMB but RMB is not tradable currency in the FOREX market.

Recently i discovered that CME has a RMB/USD product (http://www.cmegroup.com/trading/fx/fx/chinese-renminbi_contract_specifications.html)

Do you think it would make sense to buy SGD/USD contract and USD/RMB contract? that would be 'almost' equivalent to a SGD/RMB contract but probably at a higher cost (due to the back to back contract).


icecold1967 said...

Hi BP,

That will be closest to the exposure you want.