Living as a foreign resident in Singapore offers numerous career and lifestyle opportunities, but one of the challenges is managing currency risk. As a foreign resident living in Singapore, you may have investments or other assets abroad and you may frequently engage in international money transfers. However, fluctuating exchange rates can create the potential risks of losses during these transactions. In this article, we will explore the impact of currency risk on foreign residents living in Singapore and provide practical strategies for effectively managing and mitigating this risk.
What is currency risk?
Currency risk refers to the potential loss that arises from changes in the value of one currency in relation to another, especially when transferring funds across international borders. It is a result of the constant movements in exchange rates, which can have a significant impact on the overall value of assets and the cost of transfers. Currency fluctuations can happen due to various factors, often relating to the wider economic and political climate in the countries involved. As a result, managing currency risk becomes important to safeguarding the value of assets and ensuring efficient international transfers.
How does currency risk affect foreign residents living in Singapore?
There are several ways that currency risk affects foreign residents in Singapore. Firstly, if you earn income in Singaporean dollars but have expenses or financial commitments in another currency, fluctuations in exchange rates can significantly impact the amount of money available to cover your expenses. Similarly, if you make regular (or occasional) transfers from overseas to Singapore, if the Singaporean dollar strengthens, the value of your funds will be reduced.
Lastly, currency risk can also impact the value of investments and other assets (e.g. real estate) held by foreign residents in Singapore. If you are investing in assets denominated in Singaporean dollars for example, changes in the exchange rate can affect the value of those investments if you want to sell them and take the funds abroad, and vice versa. If you depend on income generated by your assets, fluctuations in exchange rates can reduce your investment returns and so your income.
Determining your base currency
Your base currency is the currency in which your account is denominated and serves as the benchmark for measuring the performance of your investments. For instance, if you reside in Singapore and your account is denominated in Singapore dollars, then your base currency would be the Singapore dollar. Alternatively, if you haven’t settled permanently in Singapore, you may have investments in another country and consider that country’s currency your base currency. Determining your base currency allows you to measure and watch currency fluctuations and how they affect your asset values.
Evaluating your currency exposure
Currency exposure refers to the total value of investments in your portfolio that are denominated in currencies other than your base currency, converted into your base currency. For instance, if you hold SGD 10,000 worth of Singaporean stocks and your base currency is US dollars, then your currency exposure is the US dollar value of those Singaporean stocks.
Understanding your currency exposure enables you to assess and manage the associated risks and make informed investment decisions. If you have a significant exposure to a particular currency, it may be advisable to consider implementing strategies to mitigate potential risks.
Seeking guidance from a financial advisor with experience working with foreign residents in Singapore can assist you in evaluating your currency risk, defining your investment goals, and developing a tailored strategy to manage your risk based on your unique circumstances and risk tolerance.
Strategies for managing currency risk in Singapore
Fortunately, there are several effective strategies that foreign residents living in Singapore can employ to manage their currency risk and safeguard their finances. Consider the following options:
Hedging your currency risk
One strategy to hedge your exposure to foreign exchange fluctuations is to earmark specific investments for their planned use in the same currency. For example, if you are saving to acquire a home in GBP, then save and invest in GBP denominated assets. In this way, you can avoid a situation where currency fluctuations result in you having insufficient savings to complete your purchase. Also, if you are borrowing money to acquire an asset such as an investment property where the income (rental) from the asset will service the loan and also act as collateral, the loan and asset should be in the same currency. Not doing so can result in significant foreign exchange exposure and significant loss.
Utilising currency exchange services
Opting for currency exchange services that offer competitive exchange rates and low fees, as opposed to traditional banks, can significantly reduce your costs when transferring internationally. Services like Moneycorp and Wise enable you to take advantage of favourable exchange rates and may offer transaction setups that execute only when rates are advantageous. However, it makes sense to compare rates and fees among different international exchange service providers before making a decision.
Diversifying your assets
Diversification across different countries and currencies can help reduce your exposure to currency risk. By investing in a diversified mix of assets denominated in different currencies, you can potentially offset losses in one currency with gains in another. Again though, seeking professional advice is essential to ensure that your investment strategy aligns with both your currency risk management goals and your broader financial objectives.
Monitoring exchange rates
By actively monitoring exchange rates, you can make informed decisions about the timing of currency conversions. There are numerous online tools and mobile apps available that provide real-time exchange rate tracking and you can set up alerts to let you know when rates are favourable.
Strategic planning
If you anticipate the need to repatriate funds abroad in the future, for instance, closely monitoring exchange rates and planning accordingly can help mitigate potential risks. By staying proactive, you can potentially reduce the impact of currency fluctuations on your financial well-being.
In conclusion, by understanding currency risk and implementing effective risk management strategies, foreign residents living in Singapore can protect their wealth and minimise costs associated with international transfers. It is important to seek professional advice though, and to stay informed about current market conditions. If you have any further questions or require personalised financial planning guidance, contact a qualified financial advisor.
If you have any questions about financial planning as a resident in Singapore, don’t hesitate to contact us.