My dual currency trade

Not sure if I was lucky or unlucky, my NZD was converted to USD at the rate of 0.539 thanks to the recent upsurge. According to my technical analysis, the rise of NZD/USD has been inconsistent with its underlying trend, ie giving a negative divergence. Improving risk appetite had been a main driver of kiwi's recent rally, but the correlation had faded in the past week.

Looking at NZD, basically economic growth had remained slow in the NZ as the current global downturn has dried up demand for its exports. The manufacturing sector decline for a 11th straight month which could lead companies to start shedding workers. The labour market has remained resilient adding workers over the past three quarters. Yet, if domestic growth falters in conjunction with exports then the country’s downturn could accelerate. The recent OECD report painted a sour picture as it forecasted that “a deep and protracted recession, involving a housing market correction and deleveraging of household and business balance sheets, is unlikely to be avoided”. The country’s high debt levels and credit rating risk make monetary policy tricky for the RBNZ, but markets are expecting another 25-50 bps cut at their June policy meeting.

As I'm typing, NZD is dropping back to the levels one month ago when I sold the currency option. On the current bull run on equities, my view is agreeable to the "bear-market rally" Blue chips started to rise to overbought levels and in the recent week, penny stocks saw a substantial rise in their prices. This worries me as I have learnt painful lessons that once pennies start to rise, it means that aunties and uncles started to flood the market. True enough, I have increasing inquiries by aunties and uncles come asking about how to buy shares, talking about market bottoming and economy recovery. Some even wanted to put EUR fixed deposit. To me, it is still a traders' market and real investors are still sitting by the edge watching on. Furthermore, in the forex market NZD and AUD has started to react downwards, which I intuitively see as early signs of a imminent correction of the equity market.

However, I do see a potential in AUD although it has risen by a fair bit. But it is this fair bit that confirmed the uptrend or consolidation mode. My next trade would probably pair with the AUD. Looking at current price, the AUD definitely has room for some retracement. AUD is a commodity currency. As long as there is demand for commodities, AUD will survive, and China has been the main buyer. My personal view is that AUD has bottomed and it is consolidating between 0.60 and 0.75 against the greenback now. It is trying to form an uptrend and once the trend is confirmed, there is no turning back.

My dual currency trade

Last week fixing my trade remained in NZD, about 500 pips below my strike price. Today did a trade again, this time pairing with AUD, striking at 1.18, but the yield this time is very low, only 6.3%pa. Anyhow, I proceeded as nowadays the yields are much thinner compared to past few months. AUD/NZD is currently trading at about 1.202, so I'm striking at about 200 pips below the spot.

I'm trying to convert my whole sum from Kiwi to Aussie at the rate of 1.18 which lies onthe long term support trend line projection. The reason is because over these few months, I have observed that the Aussie is more resilient than the Kiwi in bad times, and perform better in good times. Looking at the graph of AUD/NZD in the long term, there is gennerally an uptrend though high short-term volatility.

Observing AUD/SGD and AUD/USD, I feel AUD is at consolidation mode, recently attempting to form an ascending triangle. At the current momentum, this could spell that AUD may break upwards anytime. On the other hand, NZD/SGD and NZD/USD is all the way a step-down ladder, failed double bottom formation and breaking new lows, which means that the Kiwi could still take quite a bit of time to recover, if happens.

My dual currency trade

Today I sold a contract of changing NZD to USD at the rate 0.5979 one month later for 32% pa returns on my capital. I analysed that in the short term, NZD will fall while USD will rise. I will remain in NZD if the stock market continues to fall. I feel that the current bull run is a rebound as there are no confirmed signals to convince a trend reversal. To hedge this movement, I'm considering to buy some blue chips, so that either way the market goes, I will maximise my gains.

My dual currency trade

One month had passed. Two days ago my trade had been fixed. I paired my NZD with CHF at 0.7728 strike/spot. It ended up at around 0.7400, so it is well covered with 300+ pips. I got back my NZD with 19.1%pa interest. I was thinking if I had shorted it on the FX market myself, I could have earned like 4% of my capital. But trading this currency option, I am only earning 1.6% of my capital. That's more than double the difference. Hmm... Well but of course, trading on the FX market is certainly more risky as the profit and losses are directly reflected by the direction of the curves. Currency options trading limits your losses but limits your gains as well.

Nowadays with the high volatility, option yields are much higher offered by banks. My latest trade done yesterday, I paired my NZD with CHF again, now with a whopping 25%pa yield. I did not do it at strike/spot again. I strike it at 0.7500. That means if NZD/CHF is 0.7500 or above, I get back in CHF. If NZD/CHF is less than 0.7500, I get back in NZD. The reason I choose CHF again is because CHF is on a long term uptrend with SGD. Besides, CHF is considered a 'safe heaven' in bad times like this. I predict that NZD will continue to fall, but with less momentum. ADX and MACD has shown signs of weaknesses of the fall of NZD. However, there is no signs of confirmed trend reversal yet.

My dual currency trade

Yesterday was my fixing date again, I did another dual currency option trade. This time, the amount doubled as my NZD FD has matured. As NZD FD interest rates now are only 7%+ pa, I had decided to take it out and do dual currency instead.

I paired my NZD with CHF with a yield of 19.1%pa at strike/spot 0.7728 for one month. This is so far the highest yield I've got. In retrospect, it was indeed a quite dangerous and bold move as I was literally shorting NZD/CHF at 0.7728. NZD had a little rebound recently but not substantial enough to warrant a confirmation in change of direction of its downtrend. Fundamentally, the Reserve Bank of New Zealand had also indicated on July 24 that more rate cuts are likely in the following 6 months. NZ economy has also been weaker, causing poor sentiment. Looking at monthly charts, NZD has repeatedly declined over the past 3 months. Unless there is unexpected good news, NZD should continue to drop. However, I noticed that the drop in NZD is slowly losing momentum recently so I guess it will probably steer sideways for the time being.

UOB 6-month NZD FD Promotion

This is not new, but since I just received this flyer together with my UOB statements which says "Enjoy 8.128%pa on a 6 month NZD Fixed Deposit", I decided to do a simple write-up here.

I'm sure many people will be attracted by this high interest rates, and I am sure many folks out there do not understand about exchange rates, and bank's exchange rates. To them, they probably think that it is a normal fixed deposit, just that it's in foreign currency, yet higher interest rates. Whether the bank tellers will disclose the FX risks clearly to every depositor, I am not sure.

United Overseas Bank Limited . Far Eastern Bank Limited

Rates as at 05 August 2008 03:26:18 PM
Code	Foreign Currency	Unit	Selling TT/OD	Buying
				TT	OD
AUD	AUSTRALIAN DOLLAR	1	1.2792	1.2572	1.2522
BND	BRUNEIAN DOLLAR	1	1.0000	1.0000	-
CAD	CANADIAN DOLLAR	1	1.3313	1.3073	1.3013
EUR	EURO	1	2.1477	2.1247	2.1197
GBP	BRITISH POUND	1	2.7087	2.6737	2.6632
KWD	KUWAIT DINAR	1	-	-	-
NZD	NEW ZEALAND DOLLAR	1	1.0084	0.9864	0.9814
USD	US DOLLAR	1	1.3830	1.3690	1.3630
ZAR	SOUTH AFRICAN RAND	1	0.1922	-	-
BDT	BANGLADESH TAKA	100	2.0643	-	-
CHF	SWISS FRANC	100	132.3498	129.8498	129.4498
DKK	DANISH KRONER	100	29.0767	28.2967	27.9967
EGP	EGYPTIAN POUND	100	26.8338	-	-
HKD	HONG KONG DOLLAR	100	17.8155	17.4655	17.3355
INR	INDIAN RUPEE	100	3.4023	3.0523	2.8523
JPY	JAPANESE YEN	100	1.2897	1.2657	1.2622
LKR	SRI LANKA RUPEE	100	1.2944	-	-
MXN	MEXICAN PESO	100	14.0130	-	-
NOK	NORWEGIAN KRONER	100	27.0774	26.3774	26.0774
PHP	PHILIPPINES PESO	100	3.1538	-	-
PKR	PAKISTAN RUPEE	100	1.9554	-	-
SAR	SAUDI RIYAL	100	36.9741	-	-
SEK	SWEDISH KRONA	100	22.9229	22.3229	22.0229
THB	THAI BAHT	100	4.2110	3.9910	3.9110
TWD	NEW TAIWAN DOLLAR	100	4.5400	-	-
KRW	KOREAN WON	1000	1.3780	-	-
VND	VIETNAMESE DONG	1000	0.0828	-	-

Above is a table which I copy and paste from UOB website as at now.
Look at NZD bank buys at 0.9864 and bank sells at 1.0084. At yahoo finance, the current spot rate is now 0.9981. Effectively you are buying at 103 pips above the market which goes to the bank's profit.

The FX risk here is that the exchange rate is subjected to fluatuations. Currently, NZD chart is looking very bad, still on a big downtrend, it is now even cheaper than SGD now, really very bad. By simple technical analysis, it will still go down further. If you know of anyone who wants to put NZD Fixed deposit with a bank, try to stop them. Not only NZD is going down, SGD is also going up as part of MAS' inflation curbing policy

My dual currency option

I had done premature withdrawal on my SGD FD in the beginning of 2008 as the rate was only 2.18%pa.

I started dual currency options with a local bank. Subsequently I sourced for other banks which can give a higher yield. If you have SGD 200k, sign up for premier/priority banking to have a RM to serve you. This is not for prestige purposes, but for convenience's sake, because you can do phone trades which saves you the hassle of going down to the bank personally and filling up all the paperwork. More importantly, premier/priority rates are usually higher than mass banking rates, ie higher returns.

From Jan08 to Jun08, I have paired SGD with NZD. As NZD has dropped quite a lot recently, my principal is now in NZD. Last month I paired NZD with EUR at strike/spot 2.0687 for a period of 1 month, with yield of 15.3%pa.

On the 29Jul, it was my fixing date again. The spotwas 2.1250, a whopping 600 pips rise! Hence my NZD was not converted to EUR, and I got double the interests than placing normal NZD fixed deposit. I do not want to pair it with EUR again because EUR is too high for now. If I strike at spot, I may buy EUR at a high price. If I strike 100 pips away, I can buy it cheaper but chances of buying it is also lower. I looked at other alternatives like SGD, AUD, etc but the curves all look too steep against the NZD.

I placed NZD to pair with CAD at 0.7610, at strike/spot again, 1 month at a yield of 16.3%pa. Reason I do this is because CAD is as weak as NZD recently. Mid term chart of CAD/NZD is almost sideways, with a slight uptrend in the long term chart. Observing CAD/SGD long term chart, the curve is downward sloping, but increasing gradient. It means the MACD is actually rising. Technically speaking, there is a positive convergence, which is a bull sign. In layman's terms, I have a good chance of buying CAD cheap, and CAD has the potential to rise against SGD in the long run. The rationale behind is because I have suffered too much loss from NZD, which just had interest rates cut last thursday, and NZD doesnt look very good in the long run, so it's time for me to cut loss and run.

To explain strike/spot in layman's terms, it simply means my strike price equals the spot price. In another words, it is zero buffer, 0 pips away from the spot. This often gives the highest yield, compared to a 50 pips buffer and a 100 pips buffer, because in terms of risk , 0 pips away is considered to have the highest risk because it is easiest to get converted, which is exactly what I want, because I want to get out of NZD.

Dual Currency Options

Some may have heard this, some may not. Some think of this as a high risk product, to me it is safer than equities with a guaranteed interest which is quite high.

Dual currency options is a short term product, from 1 week to 3 months. It is usually done in big amounts by priority/private customers. As this is a classified as a high risk and complicated product, most aunties and uncles do not understand the mechanism.

How does it work? Basically, you are selling an currency option to the bank, whereby the bank pays you the premium for it. It usually comes in 1 week, 2 weeks, 1 months, or 3 months for you to choose. We will pair your SGD with an alternate currency, say NZD. When it matures, you either get back SGD or NZD, whichever currency is weaker. At the same time, you gain the premium.

Let's assume NZD/SGD current spot is 1.04, we pair SGD $100,000 with NZD at the strike rate of 1.03 for 1 month, yield 10% pa. This means that if NZD/SGD > 1.03 after 1 month, then you get back SGD $100,000 + 10%pa interest = SGD $100,833. If NZD/SGD <= 1.03, ie your money is "striked" at the rate of 1.03, which means you get back NZD $97,087 + 10%pa interest = NZD $97,896. For both cases, you are guaranteed to get 10% pa interest, So no matter what currency you got back, you still earn effectively 10% pa for that period you put in. The buffer for this case is 100 pips because you strike it at 1.0300 against the current spot at 1.0400. If you select your buffer as 50 pips, that means you will strike at 1.0350 against the current spot at 1.0400. 50 pips is more risky than 100 pips, because it is nearer to the spot rate.

So how would we make a loss? Loss is made if NZD falls beyond your strike price. In the previous example, my strike price is 1.0300 against current spot 1.0400. One month later if spot drops to 1.0172, my placement gets converted to NZD, which I'll be getting NZD $97,896. When the spot is 1.0172, it means that my NZD would be worth (NZD $97,896 X 1.0172) SGD $99,583 which means I lost SGD $417 even after 10% pa interest. However, if one month later spot drops only to 1.0236, my NZD will be worth (NZD $97,896 X 1.0236) SGD 100,208 which means I still make a net gain of SGD $208 despite the drop in NZD beyond my strike price. To add on, technically speaking trading dual currency options is really not as risky as equities. With spot at 1.04, strike at 1.03, yield at 10%pa, you can afford to have the spot to drop to 1.0215, which is the breakeven point. Hence, there is a buffer of total 185 pips from the spot.

Pls see table illustration below:

				If Reconverted to	Interest
	NZD/SGD	At Maturity		Base CCY SGD	(p.a.)
	1.0414	100,833.33	SGD	N.A.	10.00%
	1.0409	100,833.33	SGD	N.A.	10.00%
Current Spot Rate:	1.0400	100,833.33	SGD	N.A.	10.00%
Strike Price:	1.0300	100,833.33	SGD	N.A.	10.00%
	1.0257	97,896.44	NZD	100,416.67	5.00%
	1.0236	97,896.44	NZD	100,208.33	2.50%
Breakeven point:	1.0215	97,896.44	NZD	100,000.00	0.00%
	1.0172	97,896.44	NZD	99,583.34	-5.00%
	1.0130	97,896.44	NZD	99,166.67	-10.00%

The yellow region indicates we get back SGD 100,833, while the green region indicates we get back NZD 97,896, with the margin at the strike price 1.0300. From this table, you may think that the upside potential is limited. It is true because you are getting back in base currency, SGD. But with 10%pa, I don't think anyone should complain about it. The good thing is that it provides enough cushion if the market goes against you.

The grandest thing about dual currency is that you will buy the currency cheaper than current spot. Back to the example, if I approach the bank teller to place NZD FD, she would sell me at 1.06 given the current spot is only 1.04. If I buy from the banker through dual currency, I can buy much cheaper at 1.03 and still make a gain of 10%pa upfront. You do the math.

Placing Foreign Currency Fixed Deposits

Many people came to ask me, from the young to the old, what are the pros and cons of placing foreign currencies. It is understandable because currencies like NZD and AUD are giving 6-8% pa which are much higher compared to our pathetic SGD fixed deposit rates.

I always tell the story of 1 year ago when NZD/SGD was at 1.1758. Today, it is fluctuating around 1.0300 to 1.0400. Effectively it has gone down by 12% while the interest was say 8.5%. So is it really worthwhile?

When we place any foreign currency with a bank, we are subjected to the bid and offer prices. These prices are engineered to be lower and higher than current spot rate always. For example, if current spot rate of NZD/SGD is 1.04, banks will usually sell higher at 1.06 and buy back at only 1.02, which means you get charged whenever you buy or sell the currency. So when customers ask me, I always tell them that putting in foreign currency is like buying a unit trust. The exchange rate fluctuates which affects your capital, and also comes with sales charge when you buy or sell.