The majority of people in Singapore will probably earn their income in Singapore Dollars (S$) and spend most of it in S$ as well.

For people like us, it then makes sense to plan our finances using S$ as the base currency.

If you invest into overseas assets, you would want to know what is your returns in S$ terms because that is your bottomline. Ultimately, you will be spending all the returns in S$.

If the currency of the asset that you are invested in depreciates, your investment would need to give a higher return for your investment to be worthwhile. Therefore, when you invests into overseas assets, you will want a higher premium for the returns as there is always the risk of currency movements wiping out your returns.

Of course, if the currency goes in your favor, your returns will end up being higher.

We can use the US Dollars (US$) as an example.

Let’s say you bought stocks valued at US$100,000 twenty years ago. The exchange rate back then was about 1.90. So, the value of your investments is S$ terms is S$190,000.

If the stocks are now worth US$122,000 today, you would have achieved a total return of 22% or 1% p.a. annualized (measured in US$).

However, based on the exchange rate of 1.32 today, if you converted your stocks back to S$, it would be worth only $161,040. This is a loss of $29,000. Measured in S$ terms, that is a 15% total loss or -0.82% p.a.

The 30% drop in the value of USD had made a 37% difference to the returns or a good 1.8% p.a.

If someone asked you about the performance of your investments, would you say your investments returned 22% in USD terms or -15% in SGD terms? I think most of us will still use the SGD version never mind the fact that USD is widely used as an international currency.

Actually, reporting performance returns in another currency can be a good way of window dressing results.

If I had kept S$10,000 under my pillow twenty years ago, my returns today would be 0% p.a. in SGD terms. Measured in USD terms, the same magical pillow would have given me returns of 1.8% p.a.

Effective from Monday 30th November 2009, a new NFA compliance rule will go into effect for all US regulated firms. The new rule dictates a 1% margin requirement for the major currencies, capping the maximum available leverage at 100:1. The new margin requirement for all other currencies will be 4% or 25:1 leverage.

The new NFA regulation is intended to protect retail investors in the US by preventing excessive use of leverage by traders who may not have an adequate understanding of the associated risks. Currently, some firms offer leverage levels as high as 0.5%.

Forex traders who have a forex trading account directly with US-based firms will be affected by the change and will need to monitor their margin levels carefully.

Here’s a nice tip if you ever need any sizeable amount of foreign currency for investment purposes or funding your children’s education.

Instead of changing it at the banks where you pay quite a huge spread, Phillip Futures has a currency exchange function where you can change it at very tight spreads.

For example, if the SG/AUD is trading at 1.29/1.305 in the banks (a spread of 150-200pips). Philips might be quoting you a rate 1.2955/1.2995 (40 pips). The exchange is transacted at live rates and can be done anytime you want, so it is pretty convenient.

Futhermore, Phillips only charges a flat fee of US$30 for any telegraphic transfer.

One example of application is for funding your foreign currency fixed deposits. You can use Phillips to change the currency you want, before transfering it to your bank account. As long as the forex savings is more than US$30, it is worthwhile.

I’ve done some calculations and found that if you are changing anything in excess of S$10,000, it will probably be worthwhile to go through the hassle of opening a futures account at Phillips Futures. They do not require you to maintain a minimum balance in the account, so you can use it purely for foreign exchange as and when you need it.

Edited: Please check with your bank whether they charge you any fee if you were to fund your account with your own foreign currency. 

For higher amounts, the savings can be significant.

For transfers to 3rd parties (eg university, offshore investments), you might need to provide some documentary proof that the transaction is legit before they allow your transfer to go through.

Please note that the currency exchange function is different from their forex trading utility. The former is mainly for clients to change currency at competitive rates without any form of leverage, while the latter is more for speculative trading. Unless you are an experienced trader, you are advised to avoid the other products inside the Phillips Futures account.

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