The important thing to remember in any foreign exchange and currency conversation is that exchange rates normalise over time.
If we look at 2020 – a year characterised by a true Black Swan event – we can see that even though the rand depreciated to R19.30 to the US dollar at its peak, the year began and ended with the rand between R14 and R15 to the dollar. The long-term view, coupled with a long-term savings and investment strategy, is always advisable because it removes emotion and knee-jerk reactions from investment-related decisions.
Preparing for Black Swan events
True outliers, otherwise known as Black Swan events, cannot be predicted. They come as a complete surprise to all involved and can quickly turn economic performance, market sentiment, and forex valuations upside down.
As we know, the COVID-19 pandemic sent global commerce reeling and we certainly felt the impact in the depreciating rand, particularly mid-year. However, after the peak in June, the rand steadily appreciated again.
If we look back a bit further, to 2019, we see a much calmer and more consistent picture, with the rand hovering between R14 and R15 to the dollar for most of the year. 2021 has been a year of steady rand appreciation.
The question thus becomes: How do we make the most of a strong exchange rate without panicking when the rand experiences a downturn, particularly when it’s impossible to know what is around the corner?
Foreign Currency Accounts and long-term savings plans
A Foreign Currency Account (FCA) is an account that designates savings in a currency other than your home currency. For example, it allows you to save in US dollars or the Pound Sterling at the exchange rate at the time of your deposit. If the rand fluctuates, it does not alter the foreign currency you hold in your FCA.
However, the key to successfully saving foreign currency in an FCA is consistency. Steadily saving each month with a direct deposit allows you to benefit from surges in the rand and protect yourself when the rand depreciates. As we’ve seen, long-term this smooths out currency risk through the course of the year, and of course, when the rand is particularly strong, you can capitalise by moving more than your usual amount into your FCA as well.
No minimum balance required
The balance in your foreign currency account is considered a local investment. It does not earn interest if the interest rates in that country, for example the United States, have negative or extremely low interest rates. Many foreign currency accounts attract expensive account fees, but Sasfin Bank currently offers this service free to our customers and we require no minimum balance.
It is important to note that having a foreign currency account is not without tax implications. This will either be reflected as a tax deduction or a taxable income, depending on whether you have made a loss or a gain during the tax year.
According to Sarah Simson, Head: Fiduciary at Sasfin Securities, a practical example of the tax application is as follows: You exchange R14 for $100 in the 2021 tax year and by 2022’s tax year, you hold the very same $100, but the exchange rate had fluctuated to R15 to the dollar. In this instance, you would have gained R100 on the rand depreciation, so you would have to include this as income for tax purposes. Conversely, you would apply a deduction for a loss, if the rand had strengthened against the dollar. Whilst this summary is not intended to be an exhaustive application of the relevant taxes, it is intended to alert you as to the associated tax obligations that may arise in respect of having such an account.
At Sasfin, we currently offer 8 different currencies through our FCA account, the most popular of which are the British Sterling, the Euro, US Dollar and Australian Dollar.
When you want to make a deposit or withdraw from your FCA, simply send an e-mail to your Customer Relationship Consultant.
To find out more, email firstname.lastname@example.org and start saving for something fun today!