investing in australian cd's

[frank]

I notice that the return on cd's in australia are substantially higher. what would be the pros and cons of investing in them? I would have to go to australia to open the account. any thoughts?

 

[growing_older]

You are not the only one interested, but I have no idea of how to start or what the pitfalls may be. Anyone done this?

 

[Gone4Good]

What do you know about Australia's economy, it's banking system, the drivers of its inflation, interest rates, and exchange rate?

If the answer is "not much", I'd include that on my list of "cons."

 

[sailor]

Probably the easiest thing for an US based individual investor would be to open a AUD CD with Everbank:
https://www.everbank.com/personal/foreign-currencies.aspx?tab=cds
Pitfalls like with everything else - you pay your money and take your chances.
I don't have an account with them so I don't have personal experience with Everbank, just a significant percent of my NW is in foreign currencies.
Keep in mind that you pay a lot for US based access and FDIC insurance,
for example 3.6% 12 months CD yield in Everbank vs. 6.0% main street Australian banks.

 

[smjsl]

2 main cons I can think of:

(1) US CDs have FDIC protection. Do these CDs have the same or analogous protection that you would be comfortable with?

(2) Since you have to transfer money into and from another currency (assuming you plan to eventually spend US dollars), you are effectively also playing foreign exchange game (i.e. what will their currency be worth later vs now in US dollars). Nothing wrong if you want to play that game - just realize that it's not a plain "CD" return, but a CD return + some X, which is the difference in exchange rates now vs whenever you convert the money back. That "X" could be much larger in value than the CD return itself...

 

[frank]

If you invest a lot in foreign currencies, where did you learn? exchange rate? what currencies? etc.

 

[SVHoper]

I think the biggest risk is that the AUD was at 52c earlier in the decade... 75c not so long ago. These currency shifts are much greater than 6% or so CD rates.

So you are kinda substituting currency speculation for CD "safe" investment.

 

[Nords]

what would be the pros and cons of investing in them?

Search this board for the keywords "chasing yield":
Early Retirement & Financial Independence Community - Search Results

 

[BigNick]

The AUD is a slightly strange beast as currencies go (Wiki).

But if you're the kind of person who puts a lot of money in CDs, you're probably not the kind of person who should be putting a lot of money into foreign currency. Currency trading is essentially a zero-sum game and unless there's a very good reason why you expect to do better than the professionals for a short period, it's best avoided. (You're probably already exposed to some currency risk through your equities, unless you only own companies which don't generate revenue outside the US.)

 

[brewer12345]

Here: have some crack (its refreshing). Now go buy some junk bonds instead if you want to foolishly chase yield.

Here endeth the lesson.

 

[Gumby]

2 main cons I can think of:

(1) US CDs have FDIC protection. Do these CDs have the same or analogous protection that you would be comfortable with?

The foreign denominated cd's at Everbank are FDIC protected (but not for exchange rate risk).

 

[nphx]

The last time I looked at Everbank was when I was considering Iceland CD's hmmmmmm. Nothing bad i can say about Everbank but they facilitate your entry into the unknown market.

 

[traineeinvestor]

Something of a contrast between the sentiment in this thread and the views on the USD being expressed elsewhere.

Personally, I would only do it if either (i) I had a need for AUD or (ii) I had (after doing my research) decided that I wanted to invest in AUD. If I was going to buy the currency, then buying some AUD denominated CDs or bonds (or other investments) would make sense. I wouldn't buy just because the yield looked attractive - the currency would have to look attractive as well.

 

[SVHoper]

The last time I looked at Everbank was when I was considering Iceland CD's hmmmmmm. Nothing bad i can say about Everbank but they facilitate your entry into the unknown market.

Well if the AUD tanks after you have moved a chunk of retirement money... you could just exchange the rest of your USD and retire in Oz.... healthcare would be a lot cheaper and 'twould be a tad warmer than Iceland

 

[frank]

oz sounds like my kind of place. How do I get there? thanks for all the replies. I think I understand a little more about the exchange rate than before.

 

[harley]

oz sounds like my kind of place. How do I get there?

YouTube - Follow The Yellow Brick Road - The Wizard Of Oz

It's outta the park!

 

[CoopersBeach]

oz sounds like my kind of place. How do I get there? thanks for all the replies. I think I understand a little more about the exchange rate than before.

It's actually pretty hard to immigrate to OZ unless you're young, have desired skills, or have money to invest and start a business there. Unlike the US, OZ doesn't just accept all comers. They actually pick and choose the people they want to accept. The US would do well to adopt a similar policy, but of course that will never happen.

Here's the link: Department of Immigration & Citizenship.

If you're over 55 and have money, you can essentially "buy" your way in for a "retirement" visa that allows you to stay there for a period of time, to be renewed periodically.

As far as opening a bank account in OZ, you have already missed the boat. OZ dollar is now at parity with the US dollar. Should have done this earlier in the decade when the exchange rate was much more favorable.

OZ being a huge exporter of commodities, chances are its currency will continue to be very strong and likely to outperform the US dollar. If you do open up an account there, you will have to go there in person, and if your deposit exceeds US $10k at any time during a calendar year, you will have to disclose the account to the IRS. You will of course have to pay income taxes on any interest earned. Given all the work involved, I would say it's not worth it unless you have substantial assets or have business interests in OZ that require to have some facility to bank locally.

 

[frank]

If you made interest in australia, why would you have to report to the irs. I assumed you would pay tax in australia.

 

[Gumby]

Australia may (probably will) tax you. The U.S. will also, as all U.S. citizen income is taxed regardless of where it is earned in the world. There may be (probably is) a tax treaty between the US and Australia that will allow you to take credit for any taxes paid to Australia, but you must still report the income on your 1040.

And don't forget that you will also pay taxes on any currency gain (and get a deduction for losses). Thus, for example, if the USD and AUD are trading at parity and you buy a $1000 1 year 5% CD denominated in AUD, and over the next year, the AUD rises to $1.05 USD, you will report $100 income when the cd matures -- $50 of interest and $50 of currency gain. That currency gain is ordinary income, unless you meet some tricky rules to be designated a currency trader. Look at the IRS website.

Buying AUD denominated cd's through Everbank does not expose you to taxation by Australia

 

[DangerMouse]

Australia would impose a withholding tax of 30%. If you are a US tax payer you are required to report worldwide income, so obviously you would report any interest paid as being part of your income and claim the withheld tax as a tax credit. As someone else pointed out, it gets messy having to lodge forms every year detailing your bank account numbers along with the balance. They have really cracked down in this area so I wouldn't want to try and get around it by not reporting it.