Saturday, June 09, 2007

Here is your chance to ride a Rising Currency

Do a Yen carry trade.
ie; borrow from a low interest, uninspiring stable currency like Yen and invest in a country with high interest rate and rising currency.
definition of stable and/or devaluing currency - economic growth of the country is low, say less than 2% pa. and the country is awash with savings such that interest rate is perpetually low.
definition of appreciating currency - economic growth is high, say above 3%, and the savings rate is low, such that the country need foreign funds to finance their growth.
Let take example of Japan's interest rate, its virtually zero. The country is awash with funds because of its traditionally high savings rate. If you could borrow money in Japan, and invest it in New Zealand at 8% pa, you have got it made.
Not just you will be pocketing the difference in interest rate (say you borrow money at 3% pa and invest it in NZ at 8% pa), but you would also make money when NZ currency appreciate vis s vis Japanese Yen.

Who will lend me money?

Bollard accused of 'kick in guts'
By TRACY WATKINS - The Dominion Post | Friday, 8 June 2007

UP UP UP: Reserve Bank Governor Alan Bollard has raised interest rates again and pointed the finger squarely at debt-laden households.

Interest rates are looming as a crunch election issue after the Reserve Bank pushed its rates to a record high.

Reserve Bank governor Alan Bollard pointed the finger squarely at debt-laden households.

As the bank moves to curb inflationary pressures, some economists are picking that rates will rise again as early as next month.

"It's not the Reserve Bank doing this," Dr Bollard said.

"It's the buildup of debt by New Zealanders who overwhelmingly want mortgage finance and who are unable to finance it from other New Zealanders because the household sector isn't saving here."

Dr Bollard lifted the official cash rate for the third time this year to a record 8 per cent from 7.75 per cent.

That is expected to push fixed mortgage rates above 9 per cent.

Floating mortgage rates are already above 10 per cent.

Auckland Chamber of Commerce said it was a "kick in the guts" for exporters struggling to remain competitive as the Kiwi dollar soared.

Companies have announced job losses because of the pressure on export prices from the high dollar.

It hit a record US75.6 cents yesterday, and has been one of the strongest currencies against the US dollar in recent months, driven by our high interest rates.

Dr Bollard acted despite "tentative" signs of a slowdown in the housing market, saying his hand was forced by a third wind in the housing market in the first few months of the year, labour shortages, an increase in government spending and a "shock" windfall in dairy prices that is expected to burn a $2 billion hole in farmers' pockets during the next two years.

He immediately won support for his move from one economist, who said years of good economic news had given rise to a "bullet-proof generation", who had ignored the Reserve Bank's previous warnings because they had only ever seen house prices rise.

"They've never seen tough times," ANZ chief economist Cameron Bagrie said. Every time the economy looked like slowing, it bounced back.

"You've got an economy here that's literally bursting at the seams ... You've got an economy that, on the face of it, appears bullet-proof, but behind the scenes everyone knows it's very vulnerable.

"The housing market could turn very aggressively, things could turn sour very aggressively."

The Reserve Bank has been frustrated in its attempts to cool the housing market, with home owners signing up for fixed-rate terms of an average of 20 months.

It has also seen consumer spending rebound sharply, driven partly by the Government's Working for Families package.

Interest rates were a weapon at the last election, with Labour raising fears that tax cuts by National would push rates higher.

But with the rates now the highest in the industrialised world, National is pointing the finger at Labour for loose government spending that it says will drive interest rates up higher for longer.

National leader John Key said yesterday's interest hike was not needed.

Mr Key said Dr Bollard had not given previously rises enough time to impact on the housing market or spending.

"My view is that he didn't need to raise interest rates yesterday," he told Radio New Zealand. "He could have given it some time to flow through because. . .certain parts of the business community and the housing and private sector consumption areas are increasingly becoming much weaker."

Mr Key said the increase in the payout to farmers was a factor but mortgagees would be feeling the pain.

"Yes, dairy is likely to put some significant stimulus into the domestic market but you shouldn't also discount the fact that there are an awful lot of people now who are renegotiating their mortgage," he said.

"They are paying a considerable increase in their outgoings. The average mortgage in New Zealand is $135,000. On the renegotiaton, roughly, you will be spending about $35 to $40 a week more just to service your mortgage and in some parts of New Zealand like Auckland that could be two or three times that number – that's a huge amount for the average New Zealand worker."

Mr Key said Dr Bollard was trying to regain credibility after previously threatening hikes but taking a long time to act.

"He's now decided that he's going to win this contest and it's in a sense a game of chicken with the New Zealand housing market and one that he intends to win.

"My view is that he will continue to raise interest rates until the housing market stops in its tracks."

After Dr Bollard's announcement the New Zealand dollar rose to a fresh record of US75.6c and Mr Key expected it to go as high as US80c. Factors included high interests rates attracting Asian investors and the United states economy slowing down.

"We can track up as high as 80 cents and frankly we could do it reasonably rapidly within the next few months is possible."

National blame Government spending for fuelling inflation and Mr Key said as that was something Dr Bollard could not control the private sector was feeling the brunt.

"He's decided that because he can't control the Government and because the Government won't reign in its expenditure. . . he's now going to go into direct collision course with the private sector."

Yesterday Finance Minister Michael Cullen questioned what National would do differently after National finance spokesman Bill English made the same argument.

"Mr English's sweeping attacks on government spending are misleading voters. When is he going to explain to voters what National would cut?" Dr Cullen said.

"Cheaper doctor visits? New roads and rail. New schools and hospitals?"
- With NZPA

No comments: