0% interest credit invested at 10%+

ryanw

I have been reading with interest about the 0% interest rates offered on some credit cards in the UK.

Secured term deposits/debentures with finance companies in NZ reach up to 12%pa.

I was wondering what members think about the practicalities and sense of using "free" funds (at 0%pa interest) being invested overseas for a fixed term at rates 10%+?

There is a currency risk naturally... and possible tax issues? I'm currently in NZ and heading to UK soon. I read something similar from a fund manager securing monies ex. Japan at low/no interest and investing on the int. money market at high rates of return.

Is this a silly idea or does it have merit? Can this be done successfully by a personal investor?

Thoughts?

Stonk

When there's a difference in interest rates between currencies, then (in the absence of other factors) the exchange rate between those currencies should move steadily over time to exactly counteract it. The fact that NZD is paying a higher rate will cause it to devalue against any currency paying a lower rate. (I'm assuming that the 12% you mention is indicative of inter-bank NZD interest rates, rather than just some unsustainable one-off acount.)

So I don't think you can make money in general. Excluding unexpected currency fluctuations, you'll make the same return as you will by leaving it in GBP. Then, on top of that, you've got the exchange rate risk (due to other factors), and exchange costs. So you'll end up in the same effective position as merely having bought NZD speculatively.

I think that's how it works. It ought to, or every bank in the world would just pile into the single highest-paying currency.

monkeydust_2

Stonk wrote:

When there's a difference in interest rates between currencies, then (in the absence of other factors) the exchange rate between those currencies should move steadily over time to exactly counteract it. The fact that NZD is paying a higher rate will cause it to devalue against any currency paying a lower rate. (I'm assuming that the 12% you mention is indicative of inter-bank NZD interest rates, rather than just some unsustainable one-off acount.)

So I don't think you can make money in general. Excluding unexpected currency fluctuations, you'll make the same return as you will by leaving it in GBP. Then, on top of that, you've got the exchange rate risk (due to other factors), and exchange costs. So you'll end up in the same effective position as merely having bought NZD speculatively.

I think that's how it works. It ought to, or every bank in the world would just pile into the single highest-paying currency.

yep exactly - it aint a perfect science (economics that is! spend 3 yrs studying it) but the laws of supply and deman always hold in the end.

deemy2004

ryanw wrote:

Is this a silly idea or does it have merit? Can this be done successfully by a personal investor?

Thoughts?

As ever, its comes down to timing

On the one hand you want one country to be strong economically with rising interest rates. On the otherhand you want the other country to be weakening economically.

As for the UK.. we are weakening economically, what you need to ask is if New Zealand is strengthening or unlikely to weaken over the term of your investment.

There are other factors involved, but they are less important than is interpreted from an economic viewpoint rather than a market viewpoint i.e. trade deficits or surpluses.

A long term currency bet ?

Would probably be Buy Austrailian Dollars against the £. It seems significantly stronger than the NZD on a longer term basis.