I'm curious about switching my USD to AUD and was wondering if anyone had any insight into the issue beyond what 'seems' to be obvious. (The conversion would likely go through IDEALPRO via IB and is not leveraged.) Obviously AUD offers a much better interest rate and I don't see the dollar significantly strengthening against it (if anything I expect the dollar to continue to weaken in spite of the Fed keeping rates steady). So it 'seems' like a no-brainer to convert to AUD and to borrow USD when trading US equities. As far as I know then, the risk is limited to the dollar strengthening against AUD which is unlikely to be extreme even if it goes against me. Are there any other risks no matter how unlikely (especially 3rd party risks)? For example, I think I know of all the 3rd party risks associated with having money in American banks or brokers with FDIC or SPIC coverage but I don't know who all the 3rd parties are in a FOREX transaction, who the AUD holding bank will be, what the risk against that bank is, etc. Thanks for any insight. I'm thinking of making the move but because it involves parties outside of my normal trading I'm concerned about risk.
If you are planning to live in Australia, then have at it. If you are just hedging your dollars, I'd spread it around. If this commodity bubble bursts, which is very possible, the Aussie will get crushed. They have had a booming economy for years, almost entirely due to commodity prices.
I agree that some commodities are over priced but I don't think that they are radically overpriced. For example, oil is probably a little overpriced, but I doubt that it ever goes below $100 again (especially against the USD). China (and the others) are growing at a rate that should keep heavy pressure on commodities for the foreseeable future. I'm more worried about a sudden decline in USD as current structural forces keep putting downward pressure on it. But back to my original question, what unknown risk is there in converting a lot of cash to AUD through IB? What bank will hold that money and how are they insured?
I'd be more worried about your basis of doing this. Everything you said is complete speculation, and I agree, that the AUD is a poor place to stash all/most of your money.
Yeah, it's all speculation but isn't that what we do here? But as you can tell I don't know enough about currency trading to just throw all my cash in. Timbo, do rate differentials flip quickly or do they tend to change slowly (over months or years)? I would expect them to move relatively slowly since they are a function of central banking rates but I haven't been watching rates for years. If not AUD then where for cash? I'm not excited about the prospects for CHF or EUR, perhaps the renminbi? Of course the attraction to AUD is the rate though.
Each bank reacts to its own param's - albeit laggardly. It's actions are short term and not in regards to equity positions or outside of money flow.
That's true, but if IB (for example) through its partner banks suddenly paid 7% on USD and 1% on AUD I could just convert the money back (with the loss of the conversion cost). Of course this flip-flop would imply that the dollar is strengthening against AUD which would cause an exchange loss. But these things tend not to happen quickly (as far as I know).