Ever since the Reserve Bank of Australia (RBA) raised its benchmark interest rate by a quarter-percentage point to 3.25 per cent on Oct. 7, investors have been gaga over the Land Down Under.
In a world of minuscule and moribund interest rates, the Aussies are the only industrialized market where rates are rising - a tasty morsel for an investing world starving for better rates of return.
The question is, how can a little investor in Canada (where our own central bank's benchmark rate is a puny 0.25 per cent and going nowhere) take a bite out of the juicy Aussie largesse? Here are a few possibilities:
Open a savings account at an Australian bank, though most personal accounts carry residency requirements. And there's a 10-per-cent non-residency tax on interest earnings that will make a serious dent in your returns.
Buy Australian dollars, which will likely remain market darlings as long as the RBA is raising rates while other central banks sit on their hands. But simply holding the Aussie buck won't pay you interest.
Buy Australian government bonds (easy to do through a full-service broker). But beware steep service fees for foreign transactions. Buy Australian-dollar futures contracts. This will give you the benefit of both the rising Aussie interest rates and the rising currency - and you can do it via the Internet.
Futures contracts have interest rates built into their prices.
A contract to take delivery on the Australian currency in March, 2010, for example, is priced about two percentage points below the current exchange rate, to compensate for the interest you forgo by agreeing to take delivery on the currency next March rather than now.
You earn the interest payment up front - you're essentially paying only 98 Australian dollars to buy 100.
This option does expose you to currency risk, but that would be a bonus if the Australian dollar goes up.
You not only make money on the rate differential, but cash in on foreign-exchange gains.
