| |
 |
03 June 07 |
Hi John,
In my May newsletter, after the Reserve Bank had increased the Official Cash Rate to 7.75%, I said the statement accompanying the rise “left the market with the feeling this was the last of the interest rate rises, but the RBNZ may intervene in the currency market if necessary”.
I must say the suggestion the Reserve Bank might intervene in the currency seemed ludicrous at the time. But as we all know now – that’s exactly what happened.
As the New Zealand Herald so aptly put it “The Reserve Bank of New Zealand has taken the extraordinary step of intervening in the money market to bring down the value of the New Zealand dollar”.
The New Zealand dollar had reached a 22 year high of US 76.40 cents and was sitting at US 76.19 cents before the Reserve Bank’s action. By the end of the day it was at US 74.81 cents but within a day or so had recovered to over US 75 cents.
It’s patently obvious to anyone who knows anything about the currency markets, exchange rate movements are dominated by big financial institutions and traders. So if you’re intervening you need deep pockets, something the RBNZ hasn’t got with a capital of only $1.7 billion.
Yesterday’s Economist put it quite succinctly “As rising interest rates in some countries exacerbate the differences between high-yielding currencies and low-yielding ones, such as Japan's, New Zealand's predicament may become more familiar. Most nations with strong currencies should refrain from following its lead. After all, peashooters are of little use against a determined foe.”
Opinions are varied on the success of Alan Bollard’s exercise. Everyone seems to agree it’s not going to happen very often. But the fact that the threat is there now, could be enough to temper speculation the kiwi dollar will continue to rise.
Of course everyone’s blaming him for the problem in the first place – by raising interest rates until New Zealand has the highest interest rates in the industrialised world. And of course he’s denying it. To see Herald article CTRL click here http://www.nzherald.co.nz/topic/story.cfm?c_id=235&objectid=10444715
The reality is though, that the strength of the dollar is driven not just by interest rate differentials. Any difference between interest rates here and offshore would be immediately wiped out were the currency to fall. And the first indication the currency might fall is a slowing in economic activity.
For example, a few days ago Statistics New Zealand released the seasonally adjusted retail sales figures which were down 1.2% in April from March. The kiwi dollar fell quickly from US 75.2 cents to US 74.7 cents - but then just as quickly recovered.
Rodney Dickens of Strategic Risk Analysis has written an excellent paper on what influences the New Zealand exchange rate. His research shows multiple factors are responsible for the behaviour of the exchange rate, and while interest rates play a part, the relative strength of the New Zealand economy is far more important. To see this article CTRL click here http://www.sra.co.nz/pdf/NZdollarRaving.pdf
But so far there’s little sign that the economy is slowing. The ANZ Commodity Price Index in world terms is up 21.1% over the last year and is now 44% above its ten year average. Dairy prices have risen 74% in a year. House prices remain strong, dairy farmers are receiving record payouts, and – most important – unemployment is still extremely low.
So I wouldn’t be holding my breath waiting for the exchange rate to drop. But the Reserve Bank’s intervention in the currency may have told the market there’s an upper limit. The ASB economists suspect it could be a trade weighted index (TWI) of 74.0.
Coming back to interest rates, the rise in the OCR to 8% announced on the 7th of June caught many by surprise - especially as the Reserve Bank of Australia had the day before left their rate at 6.25%.
Interest rates here have now risen in response to the increase. The following statement in the Good Returns newsletter of 14 June is typical.
“BNZ & ASB have now increased floating rates by 25 basis points to 10.30% and TSB has increased its fixed-term rates by up to 40. To clarify BNZ’s increases to fixed-term rates yesterday – its Classic 2-year rate went up by 20 points whilst all other terms went up by 30 to 35. More non-bank lenders continue to raise rates also.”
It’s starting to look like Alan Bollard really is serious about using the only weapon at his disposal to combat inflation. This is the third time he has raised the OCR since March. Previously it’s been at 7.25% for 15 months.
- And he’s not the only central bank governor who’s thinking this way.
- The Australian Reserve Bank governor has warned that another interest rate rise is a matter of when not if.
- The Bank of Japan Governor is being pressured to increase rates there to stem the flood of money out of the country seeking higher returns.
- China’s inflation is on the increase and is putting pressure on the central bank to increase interest rates.
- Former Federal Reserve Chairman Alan Greenspan has said low long-term interest rates may not last, bringing an end to a global boom in financial liquidity.
In recent weeks there has been a steady increase in wholesale fixed borrowing costs, which set fixed rate residential mortgages here. And over the last three months the rise in fixed rates has been enormous. It’s now looking like all fixed lending rates will be over 9%.
This is good news for the Reserve Bank. A flatter yield curve – less difference between shorter and longer fixed rates – means there’s nowhere to go when your fixed rate mortgage comes up for renewal.
So what’s this mean for the housing market? Statistical and anecdotal evidence shows no real reduction in prices, house sales, or days to sell. A new record national median residential house price of $350,000 was reached for May. So there’s probably some life left in the housing market.
What’s really out of kilter is the rental return – which has nowhere near kept up with the increase in house prices. This means the increase in interest rates really does hit the bottom line for investment properties. We’re already seeing sales of some investment apartments in Auckland at well below purchase price. You’d have to wonder what will happen in smaller centres if people can’t afford to hold investment properties.
Commercial property is far more sensitive to long term interest rates. And, as we’ve seen above, it looks like these are on the rise.
But there’s still a huge amount of money sloshing around the world. And some of it’s real close. By the end of this month the Australians have their last chance to put large sums into their superannuation scheme.
All in all it looks like there’ll continue to be strong demand for good commercial property. But with the increase in long term rates I’m not sure we’re not going to see sales at the low yields we’ve seen in the last few years.
Cheers
JP
John Paine B.Sc. Dip BIA
Global Pacific Corporation Limited
112 Gladstone Road, Parnell,
P O Box 3229, Auckland, New Zealand
Phone 64 9 303 3700, Fax 64 9 303 3031
Mobile 64 21 902 004
Email john.paine@globalpacific.co.nz
Web site www.globalpacific.co.nz
Disclaimer: Please note that all opinions and statements expressed in this email are indicative of my opinion only. Global Pacific Corporation Limited issues no invitation to rely on the information contained in this email and intends by this statement to exclude liability for any such opinion and statement.
Privacy Policy: We will never rent, share, give, or sell your name or contact information to anyone. Your complete confidentiality is guaranteed. Should you wish to receive no further e-mail newsletters from me please reply to this
e-mail with the word unsubscribe” in the Subject line.