Is the Australian Dollar really the ‘safe haven’ Singaporeans are hoping for?

For years now both locals and expatriates of Singapore have been sending funds into Australia to take advantage of higher interest rates paid on deposits relative to what can be earned in Singapore. Nobody can blame them for this or even be surprised given the 3.5 – 4.5% interest payable that is possible within Australia, but what else must these investors be considering when it comes to making this investment.

The important consideration is the exchange rate between the Singaporean and Australian dollar, particularly if the funds will be brought back into Singapore in the short to medium term. When analysing our expected returns on investment, if we are using foreign currencies, we must also factor any possible changes into our calculations.

Many of the global and local banks expect the Australian dollar to fall to approximately USD 0.80 or below but what is it that may see the dollar drift this low and how could it compare to the Singaporean dollar (SGD):

• Australian political uncertainty:With the ‘to-and-fro’ leadership style of the current Australian Government we have seen sovereign risk ratings of the country rise to medium-term highs and as a result, saw a great deal of foreign investors pull out, taking profits on the exchange rate appreciation as well as the investments, particularly in the equity markets. Will new leadership in Australia come September create certainty in the markets?
• Australian interest rate anticipated movements: Most expect to see one further interest rate cut in Australia within 2013 which will result in term deposits being relatively less attractive to both foreign and local investors. Borrowing for construction projects and real estate development will wait on lower rates given they are expected which will not drive economic growth in Australia in the short-term. This compares to Singapore in which the construction sector grew by 5.1% year-on-year and borrowing rates are at record lows.
• The mining boom is waning: Job losses, projects on hold or declined, mines shutting down, commodity prices falling, slowing Chinese demand; all of these factors are contributing to a waning mining sector which have all been responsible for driving it in the earlier years. As the unemployment rate rises within the mining sector and other sectors are not picking up the slack we will see economic growth slow. As Singapore’s GDP growth for 2013 has just been upgraded we can see the relative growth of Australia also weakening.

Let’s take an example of an investor from Singapore who sends to Australia SGD 100,000 to put in a term deposit for 12 months, over which time the Australian dollar drops to 1.08 against the Singaporean dollar, compared to the current 1.14.

1. Dollars converted to AUD = AUD 87,719.30
2. Return on the Term Deposit = 4.1%= AUD 3,596.50
3. Total Value of Investment = AUD 91,315.80
4. Dollars converted back to SGD = SGD 98,621.05

Therefore, without even factoring in inflation you would have already lost SGD 1,378.95.

Whilst we can not be certain where the exchange rate will head, these are just some of the important considerations to factor into your own calculations when considering Australian-dollar based investments. There could be volatility ahead for Australia with an election just weeks away.

DISCLAIMER: Please note that all information above is for general information purposes only and is not investment advice. All readers should seek their own financial, legal and taxation advice before making any investment decisions to consider if it is right for you.