Conversion can give Hong Kong investors exchange rate gains and higher interest
Based on rates offered by HSBC, Hong Kong's biggest deposit-taking institution, a Hong Kong dollar savings account with a balance of up to HK$149,999 at present earns an interest rate of 0.25 per cent per annum.
As of February 20, when this case study was written, this could be converted into Australian dollars at an indicative exchange rate of HK$7.17399 per Australian dollar (a small premium to the 'spot' rate quoted on currency markets of 7.1484 at the time); and the resulting sum of a fraction under A$21,000 would then earn a savings deposit rate of 2.5 per cent - 10 times higher than the Hong Kong dollar interest rate.
Should the Australian dollar then appreciate, the depositor could choose a moment to convert back into Hong Kong dollars and enjoy an exchange rate gain on top of the superior interest rate. Be warned, however, that conversion may be at a small discount to prevailing 'spot' rates.
In addition, if the Australian dollar steadily depreciates - an outcome that would be contrary to consensus - the investment could backfire and produce a net loss on conversion back into Hong Kong dollars.
A six-month fixed-term Australian dollar deposit will earn 5.73 per cent versus 2.5 per cent for an Australian dollar savings account, and just 1.05 per cent for a six-month Hong Kong dollar deposit. But by locking-up the deposit for six months an investor loses the freedom to convert back into Hong Kong dollars if the exchange rate 'spikes' higher and offers a short-term currency gain.
