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Borrowing in HKD to pay AUD loans

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  1. #11

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    Quote Originally Posted by jrkob
    You misunderstood my intent, which isn't to judge your specific performance, bdw (it is your own). Rather, that historically, the volatility in the FX component of this trade is considerably higher than the volatility in the rates differential, whether you look at 2y, 5y, or 10y. And in fact, AUD volatility lately hasn't been as high as it used to be, say 10 years ago (you can see this in the below chart)

    This is a very risky trade, whichever time horizon you look at, and that's all I want to point out.

    Hope this clarifies.


    Disclaimer: I know less than nothing on F/X

    Question 1: Is the risk higher or lower when the person is borrowing in HKD then paying off in AUD AND AND the person's salary / income continues to be in HKD?

    So has BDW's risk gone up as now his salary is in AUD?

    Question 2: Is the risk of this currency pair HKD / AUD less than another currency pair because the HKD is pegged to the US dollar. e.g. does a peg to USD lessen volatility versus a pair that has no peg like say EURO to something or JPY to something

  2. #12

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    @chichow, I do not want to discuss bdw's exact personal circumstances on his behalf, let's have him revert instead.

    Q2

    does a peg to USD lessen volatility versus a pair that has no peg like say EURO to something or JPY to something
    No. The fact that HKD is pegged to the USD doesn't lower the fact that the AUD/HKD is a fairly volatile pair. The AUD is, overall, a volatile currency.
    Last edited by jrkob; 14-02-2020 at 10:18 PM.

  3. #13

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    I used BDW as an example for the question. Meaning if a person borrows in HKD to pay off AUD and what then is the change in risk factor if that person's salary switches from HKD to AUD

    you are absolutely correct that I would not want to ask BDW to put out his specific circumstance


  4. #14

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    Quote Originally Posted by chichow
    I used BDW as an example for the question. Meaning if a person borrows in HKD to pay off AUD and what then is the change in risk factor if that person's salary switches from HKD to AUD

    you are absolutely correct that I would not want to ask BDW to put out his specific circumstance
    The change in risk factor when the person's salary switches is the exchange rate from which their salary is pegged.

    So let's say loan is in HKD. Salary based in HKD and converted to AUD at spot rate at whatever interval. Living expenses are in AUD. This means he faces exchange rate risk for his living expenses.

    Referring specifically to AUD vs HKD - there's additional risk if the virus affects China's economy severely as Australia's economy is heavily tied to the Chinese economy. I'm not an f/x expert but I would guess that less demand for Australia's natural resources from China (due to less business activity) = less demand for Australian dollars = less buying pressure = further weakening. But there are always counter balancing forces so I wouldn't put money on it.
    Last edited by Viktri; 15-02-2020 at 03:21 AM.

  5. #15

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    Meaning if a person borrows in HKD to pay off AUD and what then is the change in risk factor if that person's salary switches from HKD to AUD
    Very very simple way to look at is wherever currency conversion involved, there is a downside risk or upside reward..Earning in one currency and paying off in another always involves risk be it mortgage in country A or living expenses in country B regardless of whichever currency chosen for salary, there is a risk either way, isn't it?

    Now, if you think that the salary conversion (for currency pair X-Y) has happened at the lowest point of currency X and it will strengthen in future, you will get more A) Higher relative salary in terms of currency X and B) Higher buying power for currency Y when and if X strengthens (i.e. More HKD for a unit of AUD)..

  6. #16

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    Quote Originally Posted by chichow
    I used BDW as an example for the question. Meaning if a person borrows in HKD to pay off AUD and what then is the change in risk factor if that person's salary switches from HKD to AUD

    you are absolutely correct that I would not want to ask BDW to put out his specific circumstance
    speaking generally too, its much riskier imo whenever income currency doesn’t match your liability’s currency. you’re exposed to the appreciation of the debt currency, needing more of your income to pay it off.

    Asian Financial Crisis back in ‘97 was pretty much this on a large scale. Lending rates in Thailand were in double digits but companies could borrow in USD around 5%, so many companies naturally chose the cheaper debt, with confidence that THB would maintain its USD peg. The peg eventually broke, USD spiked, companies defaulted and chaos ensued (cliff notes version)

    Where the move makes sense then to me is if you were already paying off an AUD mortgage strictly with HKD income, then converting that debt to HKD (if it’s feasible) is actually a prudent move imo to hedge the fx. I would probably do the same too, but then even if the HKD loan came with a slightly higher interest rate, which is quite different to the strategy being proposed

    btw, no issues with bdw choosing to do this and certainly he may well come out ahead for it. just hope
    ppl know what the real driver is behind it to make an informed choice
    Last edited by foxwendal; 15-02-2020 at 09:31 AM.

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