Posted on February 12, 2009 - by Market Uncle

Global Interest Rates and Foreign Currencies

Global Interest Rate Trend

Almost every month, there are news of some central banks in some corner of the earth slashing their interest rates to fight the ongoing credit and financial crisis. These came along with aggressively generous economic stimulus packages by various governments, drawn from reserves or borrowed from future generations. Theoretically, the potential amount of money flooding the market is sufficient to create a tsunami, devaluing their currencies and loosening credit. But I see no sign of any minute rise in tide across the horizon.

Global Interest Rate Trend

The above chart shows the Interest Rates of some key central banks. The aggressive slashing of the interest rates can be seen quite clearly and if extrapolating the trend make any sense, all are headings towards 0%, following the lead of Bank of Japan (BOJ) and US Federal Reserve (FED).

Signs of bottoming?

It seems to me that various currencies (against SGD) have more or less bottom out not because things had gotten better. Some governments are still borrowing, some are still printing money quite aggressively. But because most of what can be done are already done. Doing more actually does not have much impact now (other than potentially creating new bubbles for the future). What’s left to do really, is to let the market consolidate, weed out the excesses and patiently wait for the dust to settle, i.e. clear the debris and start afresh.

Potential Actions

Without taking into account whether MAS will change its stance on SGD policy in the next deliberation in April, I am considering the number of options I had to take advantage of bottoming currencies.

Foreign Currency Fixed Deposits

A check on UOB foreign currency fixed deposit rates show some expectedly disappointing rates (mirroring the recent aggressive rates cuts above). USD, for example, had no interest on 3 months fixed deposits and NZD only offer 1.83%, a far cry from a year ago. Thus, unless my intention is capital preservation, these fixed deposits are still not appealing at all. Read more…

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