When seeking an enhanced return on cash many investors turn to term deposits as a known and secure way of achieving their goal. It’s a well-trodden path but there are other alternatives for wholesale investors seeking to achieve higher income returns.

One alternative, which utilises foreign exchange (FX), is a Currency Linked Structured Deposit (CLSD). These are structured deposits issued by NAB that provide investors the potential to earn superior returns compared to term deposits, while also providing income diversification.

A CLSD involves taking a position on how one currency will move against another, like the Australian dollar against the US dollar. The return the investor receives is determined by the currency movement triggers the investor puts in place, and whether those triggers are breached. The income rate can be adjusted by shifting the triggers closer to, or further away from the spot price, which can assist an investor with achieving their desired range and return amounts.

Like term deposits, CLSDs are capital protected, meaning the original investment amount is returned to the client when the investment matures, regardless of currency performance. However, unlike term deposits, capital invested in a CLSD is not protected by the Government’s Financial Claims Scheme (FCS) guarantee and the potential yield earned will be determined by how the chosen currency pair trades.

These instruments offer flexibility and can be tailored to suit an investor’s needs and views through the following parameters:

• Investment Term – Tenor between 1 month to 1 year.
• Available currencies – AUD, USD, NZD, GBP, EUR, JPY, SGD and CAD. Other currencies may be available upon request.
• Return on Investment – either the predetermined minimum or maximum return.

Important considerations

CLSDs are particularly attractive to investors with funds sitting in foreign currency accounts, such as savings in USD or EUR, which typically offer little or no interest. While that capital is idle, a CLSD offers an opportunity to create an income stream.

Depending on an investor’s view on the direction of a currency, there are three investment options available.

Range Deposits

An investor may consider a Range Deposit when a currency is expected to trade within a range. The investor nominates a currency pair and the range they expect it to trade within over the term of the deposit. If the spot price of the currency does not breach the nominated currency range, the investor earns the maximum agreed return. If the currency breaches the range, at any time during the investment term, the minimum agreed return is earned. The wider the range, the lower the potential return.
Illustrative example^*

Term: 3 Months
Currency: AUD/USD
Maximum Return: 8.00% p.a.

Minimum Return: 1.00% p.a.
Range: 0.8050 – 0.6950.
Spot Price: 0.7500 at commencement of investment

In this example, if the AUD/USD trades within the range of 0.8050 (ceiling) and 0.6950 (floor) throughout the 3 months, the investor earns the maximum return of 8% p.a. However, if at any time during the investment the currency pair touches the floor or ceiling, the investor will earn the minimum return of 1.00% p.a.

Bull Deposit

If you expect a currency to appreciate, you might consider a bull deposit. With this investment, the investor sets a ceiling level. If the currency appreciates and touches the ceiling at any time during the term, the investor will receive the maximum agreed return. Alternatively, if the currency underperforms expectations and does not reach the pre-determined ceiling, the investor receives the minimum agreed return.

 Illustrative example^*

Term: 3 Months
Currency: AUD/USD
Maximum Return: 8.00% p.a.

Minimum Return: 1.00% p.a.
Ceiling/Trigger Price: 0.8050
Spot Price: 0.7500 at commencement of investment

In this example, if the AUD/USD appreciates and hits 0.8050 during the term of the investment, the investor will receive the maximum agreed return of 8.00% p.a. If the currency pair trades below 0.8050, the investor will receive the minimum return of 1%p.a.

Bear Deposit

If you expect a currency to depreciate you might consider a bear deposit. With this investment, the investor selects a floor price, and if the spot price touches the floor at any point during the term of the investment, the investor will earn the maximum return. Alternatively, if the currency does not touch the floor price, the investor earns the minimum return.

Illustrative example^*

Term: 3 Months
Currency: AUD/USD
Maximum Return: 8.00% p.a.

Minimum Return: 1.00% p.a.
Floor/Trigger Price: 0.6950
Spot Price: 0.7500 at commencement of investment

In this example, if the AUD/USD depreciates over the term and hits the floor of 0.6950, the investor will receive the maximum agreed return of 8.00% p.a. If the currency trades above 0.6950 the investor receives the minimum return of 1%p.a.

Risks to consider

Before investing into a CLSD it is important to understand the associated risks. For example:

• If you earn the minimum return there is an opportunity cost, as other investments, like a term deposit, may have performed better.
• A CLSD is designed to be held until the agreed maturity. They cannot be withdrawn or terminated, either in full or part, prior to the maturity date without NAB’s consent. In addition, break costs may apply.
• Unlike term deposits, they are not covered by the government guarantee.
• The FX market is subject to volatility, which includes government regulations, political factors, and overall market sentiment.

Conclusion

CLSDs are an alternative FX investment that can be tailored to an investor’s needs, allowing them to potentially earn superior returns to a standard term deposit, whilst also providing portfolio diversification.

For more information on the CLSD product please speak to a NAB Investment Specialist

* Examples are for illustrative purposes only and do not reflect current prices or outcomes. Any Yield quoted in the examples provided is on a per annum basis and is by way of example only and do not necessarily reflect the Yield You can expect to receive from a NAB Currency Linked Structured Deposit.

Important Information

Terms, conditions, fees and charges apply. The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB recommends that you consider any relevant disclosure documents and seek independent financial and taxation advice before acting on any information in this article. Past performance is not necessarily indicative of future results.

No warranty is made as to the accuracy, reliability or completeness of the information. Examples are illustrative only. To the extent permitted by law, neither NAB or any of its related entities accept liability to any person for loss or damage arising from the use of this information. ©2024 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.