Foreign currency deposits have high fees, so I considered whether you can deposit foreign currency with a low-spread FX.
Foreign currency deposits are attractive because you can grow your assets by using high-yield currencies, but bank foreign currency deposits have hidden costs. One of them is the wide spread. Considering this, it’s natural to wonder if you can use a low-spread FX to operate like a foreign currency deposit.
In this article, we will look at how effective this method is by calculating actual swap points and costs.
Differences Between Foreign Currency Deposits and FX
Let’s consider the differences between foreign currency deposits operated at banks and FX.
Spread Width
In bank foreign currency deposits, for example, the spread for USD/JPY with the South African rand is set very wide, which can offset the profit from interest rate differentials. On the other hand, FX has a narrow spread, making it easier to capitalize on interest rate differentials.
Swap Points
In FX, daily swap points are awarded based on the interest rate differentials of currency pairs. However, swaps vary by broker and market conditions, so you need to check in advance.
Flexibility of Deposits and Withdrawals
Bank foreign currency deposits are mostly fixed term, so you generally cannot withdraw immediately. In contrast, FX offers the convenience of withdrawing funds immediately when needed.
Results of Calculations with Actual Values
The calculations were performed using information from OANDA. These are values at that timing, so please treat them as references. The swap amount, spread, leverage, account type, and other factors can change the results.
1. Mexican Peso to Yen (Example)
- Rate: 7.542 yen
- Swap points: 2.43 (per 1 lot)
- Calculation for 1 lot (100,000 currency units): 754,200 yen
- Swap per day: 243 yen
- Annual swap amount: 243 yen × 365 days = 88,695 yen
- Annual interest rate equivalent: 88,695 yen ÷ 754,200 yen × 100 =11.76%
2. South African Rand to Yen (Example)
- Rate: 8.559 yen
- Swap points: 0.6 (per 1 lot)
- Calculation for 1 lot (100,000 currency units): 855,900 yen
- Swap per day: 60 yen
- Annual swap amount: 60 yen × 365 days = 21,900 yen
- Annual interest rate equivalent: 21,900 yen ÷ 855,900 yen × 100 =2.56%
3. USD/JPY (Example)
- Rate: 150 yen
- Swap points: 6.27 (per 1 lot)
- Calculation for 1 lot (100,000 currency units): 15,000,000 yen
- Swap per day: 627 yen
- Annual swap amount: 627 yen × 365 days = 228,855 yen
- Annual interest rate equivalent: 228,855 yen ÷ 15,000,000 yen × 100 =1.53%
Importance of Broker Selection
Choosing a broker is extremely important. Since banks handle foreign currency deposits, spreads do not vary much within a single day, but FX can widen spreads significantly depending on market conditions. If spreads widen at settlement, the expected profit may disappear.
If you don’t choose a suitable broker, you might end up feeling that foreign currency deposits were safer. Conversely, choosing a good broker could offer usability and interest rates superior to foreign currency deposits.
Notes on Swaps
Effect of leverage:If you lower leverage, you can operate similarly to foreign currency deposits. However, in FX, high leverage lets you hold large positions with relatively little capital, so risk management becomes crucial.
Variability of swaps:Swap points vary with market interest rates and broker settings. When compared simply to foreign currency deposits, you may find less profit than expected, so caution is needed.
Attention to exchange rate risk:For example, if the U.S. president changes to Trump in the future, there is a possibility of a sharp yen appreciation, which could wipe out a 5% or 10% interest rate differential. Such exchange rate fluctuations must be carefully considered.
Leverage Can Multiplies Interest Many Times
Using leverage allows you to earn swap interest with a smaller margin.
For example, USD/JPY swap is 1.53% annualized, but with 10x leverage, the effective yield can jump to 15.3%. This is because a position requiring 15 million yen can be held with a margin of 1.5 million yen by leveraging. Consequently, the effective interest can be 10 times higher.
However, the risk also becomes 10 times higher. The important point is thatleverage does not increase actual funds. If the exchange rate moves unfavorably and unrealized losses exceed the margin, a forced liquidation is triggered, andall funds can become zero.
With foreign currency deposits, you may incur a loss of principal, but it is rarely zero. This is the major difference between FX with leverage and foreign currency deposits. Leverage is a powerful tool, but it carries significant risk that must not be forgotten.
Also, it is dangerous to assume “if I put in more margin, there’s no problem.” Even temporary currency fluctuations can cause margin deficiencies, leading to immediate liquidations and possible complete loss of funds. Reiterating, this risk is real, and thorough understanding and cautious handling are required.
Should You Use FX Instead of Foreign Currency Deposits?
It is possible to operate FX like foreign currency deposits, but such a choice requires careful judgment.
■Pros
- Efficient operation: With low spreads, higher yields than foreign currency deposits can be expected.: With low spreads, higher yields than foreign currency deposits can be expected.
- High liquidity: Funds can be withdrawn immediately when needed.: Funds can be withdrawn immediately when needed.
- Utilize high-interest currencies: Using high-yield currencies like Mexican peso and South African rand to strategically earn swap income.: Using high-yield currencies like Mexican peso and South African rand to strategically earn swap income.
■Cons
- Currency fluctuation risk: If the market moves unfavorably, losses can exceed swap income.: If the market moves unfavorably, losses can exceed swap income.
- : Margin shortfalls from temporary market movements could wipe out all funds.
- : Swaps are not fixed and vary with market conditions and broker settings.
■Finally
When using leverage, risk management is more important than anything. To avoid funds melting away due to temporary currency fluctuations, keep margin slack and carefully adjust position sizes.
On the other hand, foreign currency deposits have the drawback of high fees, but the risk of principal becoming completely zero is almost nonexistent. FX, if used wisely, can offer returns higher than foreign currency deposits but also carries the potential for substantial losses if not managed properly.
Foreign currency deposits and FX each have their own pros and cons. It is important to choose carefully according to your risk tolerance and investment goals. If you choose FX, select a trustworthy broker and operate with sufficient knowledge to be successful.
