I have noticed that some countries with weaker economies offer savings accounts or term deposit accounts with interest rates ranging from 6-11%.

This doesn't add up to me. The idea is that nobody wants to hold these currencies, so banks need to offer higher interest rates to customers to leave their funds in this currency. But I've been monitoring this for 2-3 years and generally they're keeping pace with the US dollar. Mostly, they're currencies that performed poorly until the past 5 years, and the past 5 years they have recovered a bit. So if you'd invested in them, you not only would have received very high interest, but also would see your currency increase in value against other currencies.

Further, if this is just variance, and if it really is so obvious that these currencies will continue to fall against the dollar, why are investors not coming in and betting hard against them?

i think those are mostly the equivalent of term deposits

you would have to exchange the money in and out, and pay the fees.

accounts are not always insured

many countries with high savings rates are seen as risky, you may have just selected a few winners that were fortunate not to have disaster strike, but theres lots of big losers too. how do you know this round of winners will not be the next losers

Efficient market theory: if these banks were good sources of easy money, everyone would be doing it. Since nobody is doing this, it means it's a bad idea. QED

Efficient market theory implies that it doesn't matter what he does.

Also, the market certainly isn't efficient. Shorting 2007 mortgage backed securities was free money, for example. Hundreds of billions of dollars up for grabs and no one noticed.

Nothing wrong with examining a country's interest rates vs its prospects and deciding to invest. Venezuela is paying 22.8% for example. The 1,000,000 percent inflation might be a bit of a drag though.

On the flip side, Argentina pays 60% interest. The inflation rate last year was 26% for the first half before trending up to 48%.

What makes you think that people aren't?

The answer is simple, If you believe the interest rate will be higher than the rate of inflation then you have a profitable bet. However, you have to also factor in the risks and what can happen in the future which is the hard part.

Well, it's true, some countries offer savings accounts or term deposit accounts with interest rates ranging from 6-11%. In such economies, people rely on banks and other lenders such as Prestige Capital, Sunshine Corporation for getting money. But the rate of interest varies accordingly. Getting a higher rate of interest than inflation rate can help in getting profit but is risky and not everyone's cup of tea.

The informational disadvantage you’re at is huge.

You’d have to be really, really confident in your research unlike in other areas where worst case scenario is generally throwing darts at a board.

No. You don't think banks/funds hold foreign bonds?

OP can do this, but he's taking FX risk. Past performance doesn't imply anything about future performance.

Of course he's taking FX risk - the future exchange rate is the entire premise of the investment. They're just laying you odds for a bet.

But it isn't a conventional market where you have a bunch of participants from both sides competing on price.

If you're buying/investing directly with the bank it's not like a stock market where thousands of actors are in a big network with a bid/ask.

The actual FMV for the bet as per their analysts best estimates may well require an interest rate far in excess of what they're actually offering.

The chances of getting boned on this kind of a transaction are much, much higher than normal stock purchases where in the worst case you're basically 50/50 to have made a good buy (minus transaction costs).

If I read OP correctly, FX fluctuation is not the premise of his investment. He's asking "what's the catch on earning 6-11% on a foreign cash while the currencies haven't depreciated in the last x years". The catch simply is that you're taking FX risk, and that past performance is not indicative future performance.

It's true that a bank could rip you off, as could a shady FX broker (there are tons out there). Obviously you should verify the rate with other sources before you convert. And if you're getting a noncompetitive rate after you converted, I suppose you could transfer your currency to another bank and have them convert it. Or you could just find a reputable broker that pays interest on cash balances instead of going through a bank.

Well yea, the catch is that the inflation rate could be higher. And when you accept 12% interest on a deposit you're betting that it will be lower than that (and hopefully by a decent margin to compensate for the opportunity cost).


If there're several banks offering these accounts you could haggle it down but the process isn't without costs and you'd have to be moving a pretty large amount of money to justify the process.

I don't think inflation is a specific issue here because you will convert that currency back to your own currency, so FX is the primary risk. However yes, inflation can influence FX.

As an aside, bank deposits can be ripoffs. I'm sure if I look at the CDs offered by Wells Fargo, I'll get a return less than treasuries.

Well, we agree there. The banks exist to make money and if you aren't savvy enough to know what questions to ask they aren't obligated to inform you that you're getting torn a new *******. Same goes for credit card debt and all sorts of financial products.

Interest rate spread is also a tough one to overcome unless there is a future fx market available. If the interbank rate is 8% they could get away with offering clients 6%, for example.

Let's forget about currency conversion fees for now. There are many ways of avoiding those, so let's assume we can exchange currencies at spot.

The bigger thing I wasn't taking into account was inflation. Is it possible to make better comparisons across interest rates by taking [interest rate - projected inflation rate of the currency] and then comparing that number?

I would think, intuitively, getting 10% interest in a currency with 5% projected inflation would be better than getting 3% interest in a currency with 2.5% projected inflation. Am I missing something?

FX is the biggest risk, and I'm not referring to fees. I'm going to assume you're American and you use USD. Let's say you want to buy $100k of XYZ currency that offers 5% overnight interest (ignoring compounding) and XYZ/USD is trading at 0.8000.

You buy $100k/0.80000 = 125k XYZ.

After a year you have 125k XYZ * 1.05 = 131.25k XYZ.

However, if XYZ is trading at or below 1/1.05 * 0.8000 = 0.7619, you're losing money on this trade, because at the end of the day, you have to convert this back to USD.

There are many reasons why XYZ can depreciate, higher expected inflation can be one of them.

Do I have this right?

4/1/2018- 1 year Mexican Bond paying 7.65%
4/1/2018- $1 = 18.15 MXN
Exchange $100,000 for MXN = 1,815,000 pesos

4/1/2019- 1,815,000 * 1.0765 = 1,953,847 pesos
4/1/2019- $1 = 19.11 MXN
Exchange 1,953,847 for USD = $102,242


Or on the flip side:
12/1/2016- 1 year Mexican Bond paying 6.39%
12/1/2016- $1 = 20.61 MXN
Exchange $100,000 for MXN = 2,061,000 pesos

12/1/2017- 2,061,000 * 1.0639 = 2,192,697 pesos
12/1/2017- $1 = 18.61 MXN
Exchange 2,192,697 for USD = $117,823

I get that there is currency risk, of course. And developing countries may well have more volatile currencies.

I also understand what you're saying, that there are two parties determining the price of an equity, so at worst you're just throwing darts. A bank can set an interest rate wherever they want and you have no idea if it's good value or not if you don't do further research.

I don't understand why the exchange rate wouldn't be like a stock. It seems to be the sort of thing where you have two parties, and if it was improperly priced one direction or the other, it would get fixed pretty quickly by lots of buying or selling of that currency.

Are currencies not priced efficiently? If they are priced efficiently, doesn't it mean a currency is just as likely to increase in the next month/year as it is to decrease?

Looks off. If the peso appreciates, that should enhance your return and vice versa.

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It is priced efficiently, but if you're dealing with a bank, just make sure you're not getting ripped off. It's probably best to find a broker who will also allow you to buy bonds in that currency, or a FX broker who pays interest on cash balances.

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Also, minor correction, but it's not clear how inflation will affect FX. If higher inflation triggers hawkishness from the central bank, that could be good for the currency.

I buy VWOB and BNDX and call it a day.

F' if I know what Uruguay's currency is going to do tomorrow or ten years from now.