The management of funds can be a tricky business for travellers. Questions are raised every time there’s a need to travel overseas: How much foreign currency should one carry? Where’s the best place to convert cash? And when is it advantageous to use credit cards?
The front pages of Asian newspapers in recent weeks have been dominated by reports of the depreciation of the renminbi after China’s central bank devalued the currency, resulting in its greatest one-day loss in two decades.
The effects of a 3 per cent decline in the value of the renminbi over the course of three days was also felt in other foreign financial markets, and sent Asian currencies tumbling. It’s a demonstration of how quickly things can change and, in a region where cash is often still king, how quickly you can effectively lose money.
Stockpiling currency
So what are the risks involving cash volatility and travel? Terence Teo, portfolio manager at Aspen Hill Partners, an independent asset management company in Hong Kong, says it’s important to see a bigger picture where political, health or security issues can often play a role in risk and potential loss (think South Korea and the MERS virus, or the recent bomb attack in Bangkok).
Bearing this in mind, the portfolio manager believes that travellers should plan ahead for their travels and take advantage of depreciated currencies. In particular, travellers frequently visiting China should stockpile yuan while the rates are low.
“A rule of thumb is to buy the currency that you are most likely to travel to,” says Teo. “If the currency appreciates, than that’s an investment gain. If it depreciates further, the loss isn’t felt as hard, as you were planning to visit the destination anyway.”
A good exchange
David Fraser, managing director, Flight Centre Travel Group, Greater China, shares Teo’s views on the impact of cash volatility. In particular, he highlights the difference of the impact on leisure and corporate travel.
“Exchange rates and currency valuations can have an impact on leisure travel – Japan is very popular at the moment in part due to the weak yen, for example,” says Fraser.
“However this has less of an impact for corporate travel, where there are business needs driving the decision of where to travel.”
Fraser says travellers should be aware that while most financial institutions offer competitive exchange rates, it really does depend on the currency itself. Rates are determined by the same supply and demand economic model that is commonly used to calculate price equilibrium in the market.
Banks in Asia typically have a healthy supply of popular currencies such as the US dollar and Chinese renminbi. Therefore, their proposed rates are highly competitive. However, this can’t be said about currencies in short supply. According to Fraser: “For popular currencies the rates are generally competitive at banks, ATMs or foreign currency exchanges. However for exotic currencies there is usually a much higher margin and it’s wise to shop around to get the best rate.”
Money changers
Choosing the right money changer is just as important as getting the best rates. Teo recollects an unpleasant experience when he exchanged Hong Kong dollars for renminbi, and found a TWD100 (US$3) hidden in the stack of RMB100 (US$15.70) notes.
“I made a huge loss,” he says. “TWD100 is roughly RMB19. So instead of getting RMB100, I ended up receiving a fifth of that. I felt cheated and have never been back to that money changer again.”
The Aspen Hill Partners portfolio manager recommends doing some research and looking at the published reference rates of an institution before exchanging currency. It also helps to only visit a
money changer during weekdays, as some take advantage of bank closures during the weekend to
mark up their rates.
Credit cards overseas
When overseas, travellers are often tempted to use credit cards to make purchases, for the sake of convenience and because many of the cards promote incentives that apply only to overseas purchases. However, such perks may not be as good as they appear.
For example, business travellers will undoubtedly be attracted to using credit cards that earn
them air miles. There is a wide range of airline-affiliated credit cards available in the market, many of which promote accelerated mileage accrual when used overseas.
While the extra miles earned may initially appear appealing, Teo warns that overseas transactions on credit cards typically incur higher exchange rates, meaning that the majority of “extra miles” that one would earn is likely covered by the added premium.
“There’s no such thing as a free lunch in life,” he says. “Whatever benefits that you may appear to be getting when using your credit card overseas is probably not as good a deal on paper.”
Avoid conversion fees
While Teo has reservations about using credit cards overseas, Fraser believes that the convenience of credit cards far outweighs any risks. However, he does advise travellers to be careful about the currency choice.
“For convenience, a credit card is great and it avoids the need to carry around lots of cash. And the rates are generally reasonably good. But avoid selecting to pay in local currency and always choose to pay in your home currency, as there is extra margin for the merchant when you choose to pay in local currency.”
This is particularly true for American Express (AMEX) credit cards. Unlike Visa, AMEX does not allow retailers to charge a conversion fee, where a 3-7 per cent commission is added to your bill to convert the local currency into your home currency.
Of course, there are exceptions. Several credit cards, notably Capital One and Discover, don’t charge foreign transaction fees, meaning it would be better to pay for purchases in the local currency to avoid extra costs.
And finally, what about emergency cash? Fraser and Teo agree that the US dollar remains “the most convenient and best” currency to have in a pinch. Not only do most developed countries readily accept the greenback, but the currency itself is also fairly strong for the time being.
“I do tell my clients that the US dollar sometimes trades in trends of six to seven years,” says Teo. “There will be periods [during this time] when the US dollar is stronger than most other currencies, which is where we are right now, making it very attractive to foreign markets.”
Stockpiling currency
So what are the risks involving cash volatility and travel? Terence Teo, portfolio manager at Aspen Hill Partners, an independent asset management company in Hong Kong, says it’s important to see a bigger picture where political, health or security issues can often play a role in risk and potential loss (think South Korea and the MERS virus, or the recent bomb attack in Bangkok).
Bearing this in mind, the portfolio manager believes that travellers should plan ahead for their travels and take advantage of depreciated currencies. In particular, travellers frequently visiting China should stockpile yuan while the rates are low.
“A rule of thumb is to buy the currency that you are most likely to travel to,” says Teo. “If the currency appreciates, than that’s an investment gain. If it depreciates further, the loss isn’t felt as hard, as you were planning to visit the destination anyway.”
A good exchange
David Fraser, managing director, Flight Centre Travel Group, Greater China, shares Teo’s views on the impact of cash volatility. In particular, he highlights the difference of the impact on leisure and corporate travel.
“Exchange rates and currency valuations can have an impact on leisure travel – Japan is very popular at the moment in part due to the weak yen, for example,” says Fraser.
“However this has less of an impact for corporate travel, where there are business needs driving the decision of where to travel.”
Fraser says travellers should be aware that while most financial institutions offer competitive exchange rates, it really does depend on the currency itself. Rates are determined by the same supply and demand economic model that is commonly used to calculate price equilibrium in the market.
Banks in Asia typically have a healthy supply of popular currencies such as the US dollar and Chinese renminbi. Therefore, their proposed rates are highly competitive. However, this can’t be said about currencies in short supply. According to Fraser: “For popular currencies the rates are generally competitive at banks, ATMs or foreign currency exchanges. However for exotic currencies there is usually a much higher margin and it’s wise to shop around to get the best rate.”
Money changers
Choosing the right money changer is just as important as getting the best rates. Teo recollects an unpleasant experience when he exchanged Hong Kong dollars for renminbi, and found a TWD100 (US$3) hidden in the stack of RMB100 (US$15.70) notes.
“I made a huge loss,” he says. “TWD100 is roughly RMB19. So instead of getting RMB100, I ended up receiving a fifth of that. I felt cheated and have never been back to that money changer again.”
The Aspen Hill Partners portfolio manager recommends doing some research and looking at the published reference rates of an institution before exchanging currency. It also helps to only visit a
money changer during weekdays, as some take advantage of bank closures during the weekend to
mark up their rates.
Credit cards overseas
When overseas, travellers are often tempted to use credit cards to make purchases, for the sake of convenience and because many of the cards promote incentives that apply only to overseas purchases. However, such perks may not be as good as they appear.
For example, business travellers will undoubtedly be attracted to using credit cards that earn
them air miles. There is a wide range of airline-affiliated credit cards available in the market, many of which promote accelerated mileage accrual when used overseas.
While the extra miles earned may initially appear appealing, Teo warns that overseas transactions on credit cards typically incur higher exchange rates, meaning that the majority of “extra miles” that one would earn is likely covered by the added premium.
“There’s no such thing as a free lunch in life,” he says. “Whatever benefits that you may appear to be getting when using your credit card overseas is probably not as good a deal on paper.”
Avoid conversion fees
While Teo has reservations about using credit cards overseas, Fraser believes that the convenience of credit cards far outweighs any risks. However, he does advise travellers to be careful about the currency choice.
“For convenience, a credit card is great and it avoids the need to carry around lots of cash. And the rates are generally reasonably good. But avoid selecting to pay in local currency and always choose to pay in your home currency, as there is extra margin for the merchant when you choose to pay in local currency.”
This is particularly true for American Express (AMEX) credit cards. Unlike Visa, AMEX does not allow retailers to charge a conversion fee, where a 3-7 per cent commission is added to your bill to convert the local currency into your home currency.
Of course, there are exceptions. Several credit cards, notably Capital One and Discover, don’t charge foreign transaction fees, meaning it would be better to pay for purchases in the local currency to avoid extra costs.
And finally, what about emergency cash? Fraser and Teo agree that the US dollar remains “the most convenient and best” currency to have in a pinch. Not only do most developed countries readily accept the greenback, but the currency itself is also fairly strong for the time being.
“I do tell my clients that the US dollar sometimes trades in trends of six to seven years,” says Teo. “There will be periods [during this time] when the US dollar is stronger than most other currencies, which is where we are right now, making it very attractive to foreign markets.” 
