Question of the Week

The effect of a falling dollar on banks – and a question on structured products

Print This Post A A A

Question: What effect will a falling dollar have on the value of bank shares?

Answer (by Paul Rickard):

Thanks for the question – it is a good one. The answer probably depends on the rate of fall, and the magnitude.

If it is a marginal decline over some period, it is probably not going to have a material impact.

If it is a rapid and steep fall, the impact is more likely to be negative due to three reasons:

  1. if as a result of the fall in the currency, the market feels interest rates could be on the rise, this will make banks less attractive to domestic yield-focused investors. Rising interest rates are also potentially bad for banks in the long term due to the increased likelihood of bad debts – however in the short term, they can improve earnings due to a higher net interest margin;
  2. offshore investors don’t like weakening currencies – they may be inclined to sell their Australian bank shares; and
  3. a falling currency will drive a rotational switch by domestic investors from companies that won’t benefit materially (such as the Australian banks) to those companies that stand to gain from a weaker Australian dollar.

Question: I have two structured investments paying a flat 8% per annum with Citibank. It seems a safe way to get a reasonable return but I would like your opinion on the following:

CitiFirst MLI Coupon Plus AUD Series Assets American Express; IBM; Coca-Cola and Wells Fargo. The second is UBS Callable Goals series 24 AUD – linked to a basket of Australian Bank Shares ANZ; CBA; NAB and Westpac. The interest is paid quarterly. Am I being too cautious with this type of investment?

Answer (by Paul Rickard):

Thanks for the question.

I don’t intuitively like structured products that involve investors writing options because they are designed by smart, high-paid investment bankers – so I am a little biased.

Having declared my bias, let me say that I don’t think that these investments are low risk since potentially, you could lose all your capital. When interest rates are 2.5%, a return of 8% implies by definition that you are taking quite a bit of risk.

Obviously, I don’t know anything about your financial situation, particular needs or investment objectives – so I can’t legally say whether you are being too “cautious” or not.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Follow the Switzer Super Report on Twitter

Also in the Switzer Super Report:

Also from this edition

View More Articles