First of all, the most significant difference is leverage.
In Forex, the leverage can be up to 1:888 (for individuals), but foreign currency deposits have no leverage.
Therefore, the capital efficiency of Forex is superior. However, it is crucial to remember that targeting huge profits may also result in significant losses when trading with leverage. In addition, there are significant differences in how you buy and sell. As Forex can be bought and sold, profits can be made regardless of whether the price of the foreign currency is high or low.
However, foreign currency deposits are only available for purchase, so they cannot benefit from low foreign currency prices. As mentioned above, if we invest in the Australian dollar from a capital efficiency perspective, forex may be the best option. The advantages and disadvantages of forex are explained in detail below.
Four advantages of investing in the Australian Dollar with Forex
Using Forex to invest in Australian dollars has four main advantages.
- With leverage, a small amount of funds can generate significant profits
- You can trade 24 hours a day on weekdays
- Profit from overnight interest
- Forex can be used as a hedge for other investments
We will explain each one in detail below.
With leverage, a small amount of funds can generate significant profits
Leverage is very common in forex trading. As the leverage is up to 1:888, the required funds for trading can be 1/888 of the original amount. This has the advantage of efficiently using funds because a trader can start trading with a small amount.
In the case of EUR/USD at 1.2000, for example, it would take USD120,000 to trade one lot (100,000 units of currency) of Euros, but we can trade with leverage at about USD135. A price movement of USD 0.0001 will generate USD 10 of profit, so even small amounts can make significant profits.
Moreover, leverage is not the only reason we trade Forex with small amounts of money.
It is also related to the minimum trading volume set by the forex company. With OANDA, for example, you can start trading with a minimum of 0.01 lot (1000 units of currency).
You can trade 24 hours a day on weekdays
Forex can be traded 24 hours a day (except Saturday and Sunday). Forex connects markets around the world. Due to the different features of price movement in each session, we should develop strategies accordingly. In addition, there are also sessions that you must pay special attention to when trading.
Please refer to the following articles for the sessions when prices fluctuate and are particularly important during trading.
Profit from overnight interest.
In addition to the benefits of the exchange difference, Forex can also earn on the overnight interest rate or rollover rate (the difference in interest rates between two countries).
What is overnight interest?
It refers to the interest rate difference between the two countries of a currency pair. If we buy currencies with high interest rates and sell currencies with low interest rates, we can make profits every day. However, if we buy currencies with low interest rates and sell currencies with high interest rates, we must pay a negative overnight interest rate.
For the structure and application of overnight interest, please refer to the following article:
What is overnight interest? Introduction to calculation methods, etc.
In forex trading, many people may think they need to target profits to buy and sell frequently, but they can also continue to obtain long-term benefits through overnight interest. Australian dollar interest rates were around 7% in 2008. It has attracted much attention as a high-interest-rate currency and has also created the trend of carry trades between buying Australian dollars and selling Japanese yen. However, due to the impact of the Lehman Brothers crisis, frequent interest rate cuts, and easing monetary policy (low interest rate policy) in the context of COVID-19, the interest rate of the Australian Dollar has fallen, and the spread between the Australian Dollar and the Japanese Yen also decreased in 2022. Some of this trend reverted in 2023 as the Reserve Bank of Australia again went on a rate hike spree to fight inflation.
Forex can be used as a hedge for other investments
As forex can benefit both buyers and sellers, it can be used as a hedge for other investments.
Take the example of using the Australian dollar through foreign currency deposits and assume that unrealized gains arise. The unrealized gains will naturally decrease once the Australian dollar is in a downward trend.
While there are many advantages to investing in the Australian dollar with Forex, there are also risks.
The next section explains the disadvantages of investing in the Australian dollar with Forex.