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John Paine: June Finance Newsletter

June Finance Newsletter

By John Paine

In my March newsletter I looked at the trend in global interest rates and since then have been predicting a further rise.

I compared the differences between the various “Reserve Bank” rates shown in my November 2005 newsletter with those in my March 2006 newsletter – to see CTRL + click here .

So let’s see what’s happened since then.

- New Zealand - up 0.25% November to March - no change since then – now 7.25%.
- Australia – same November to March – up 0.25% since then – now 5.75%.

- England – same November to March - no change since then – now 4.50%.

- Canada – up 0.75% November to March – up 0.50% since then – now 4.45%.
- U.S. – up 0.75% November to March – up 0.75% since then – now 5.25%.

- Europe – up 0.50% November to March – up 0.25% since then – now 2.75%.

- Japan – same November to March – no change since then.

As far as I can gather from the remarks of commentators and economists, the following is what we can expect next.

- New Zealand – expect no drop in the Official Cash Rate until next March at least. It takes a long time for interest rate rises to impact on the Reserve Banks bugbear of increasing house prices –especially with 80% of house loans at fixed rates.

- Australia – no change in their cash rate target announced today, but expect a 0.25% increase in August or by the end of the year.

- England – many expect a 0.25% increase in August.

- Canada – no change expected when the overnight cash rate is announced next week.

- U.S. – inflation is back and new Fed Chairman Bernanke has made his inflation fighting intentions clear. Many expect the interest rate to hit 6.0% by the end of the year.

- Europe – European Central Bank has signalled interest rates will rise to contain inflation. Many expect 3.25% by the end of the year.

- Japan – falling unemployment and rising prices means the end of zero interest rate policy. There is speculation that the Bank of Japan could now raise interest rates as early as this month (meeting 14 July) but mixed messages are coming from different ministers there.

As I’ve said in previous newsletters, increased rates offshore will inevitably lead to higher fixed rates here. Some economists are now recommending fix for longer. In March they were saying 1 – 2 years, now they’re saying 2 – 3. If you’re not planning on selling, I’m now thinking fixing for 5 years wouldn’t be a bad idea.

I seem to be a bit alone here. But my reasoning is the gap between the residential floating rate of 9.55% and the 2- 5 year fixed rates at around 7.8%, means the Official Cash Rate – which sets the floating rate - has to come down a hell of a lot to make floating rates the favourite.

Meanwhile the currency continues to surprise everyone. You would have expected the NZD to have dived following the announcement of the record $104 million trade deficit in May, a current account deficit of 9.7% of GDP, and the continuing closing of the differential between New Zealand and U.S interest rates.

The NZD keeps slipping under US 60 cents and back again, after moving between US 62 and 64 cents for the past few months.

Everyone keeps saying the NZD will go lower – and the fundamentals say it should - but it seems like you get a different answer depending on the way you look at it. For example:

- According to Bloomberg “New Zealand’s dollar may rise on speculation the U.S. Federal Reserve will pause after last week raising its interest rate target, maintaining the attractiveness of higher local yields”.

- The Big Mac index, which is 20 years old this year (email me if you want the history and I’ll send it to you) New Zealand is 11% undervalued against the USD, Australia 21%, and Japan 28%. Overvalued currencies include Canada at 1%, Great Britain at 18%, and Europe at 22%.

Maybe the impending Uridashi maturities - see last month’s newsletter – will be a factor now that Japanese rates look like becoming positive.

World wide, interest rates and currencies are being driven by the Central Banks’ concerns about the housing market.

It looks more and more like a housing crash will be averted after the largest global boom ever. Rising global interest rates have started to take effect and as consumers stop using the new equity in their houses to finance a spending spree, demand and inflationary pressures should ease. Globally housing price inflation has steadied and the extent of the correction will depend on the view of the U.S. Federal Reserve’s and the European Central Bank’s next move on interest rates. It seems as though as many experts think they will hold their “cash” rates, as think they will raise them.

A recent OECD paper concluded a 1% increase in interest rates here would result in New Zealand house prices having an 87.1% probability of reaching a peak. As all of us believe an increase in the Official Cash Rate here as extremely unlikely – which would amongst other things bring upward pressure on the NZD again - it’s just as unlikely the housing market here will crash.

It looks like all major housing markets have now peaked – Japan being a possible exception – but as long as inflation remains a concern, and Central Banks’ keep increasing interest rates, the downside of a severe correction in the global housing markets remains.

Demand for commercial property continues to be very strong. The weight of money coming out of compulsory superannuation in Australia – and from Europe, the Middle Eastern, U.S. Investment Banks and Japan - has meant Sydney prime office yields are predicted to hit a 16 year low of under 6% during the next quarter.

These excess funds are overflowing to New Zealand where demand for commercial property far outstrips supply. Some smaller properties are selling at yields under 5% and even $10 million plus property yields are in the 6.5% - 7.5% range.

Meanwhile Finance Companies have hit the news following two receiverships. While their problems seem to be motor vehicle related the property sector could well be affected as negative sentiment restricts the inflow of funds from the public.

ANZ Bank’s latest Market Focus reports “Liquidity is now a major issue for the industry. Inflows to fund balance sheet growth has dried up, as rollovers of existing funding has anecdotally fallen to between 10 and 50 percent amongst lower credit quality names.” The bank observes that the majority of difficulties have been with a minority of companies with poor controls and the risk of systematic failure is low. “The higher quality names and participants that have been around for a long time remain sound” they said.

Expect to see consolidation in the sector as more finance companies merge.

With many finance companies already short of funds for property lending, or becoming far more selective - like the banks - in the loans they will consider, the proper sourcing of suitable alternative lenders becomes vital.

Needless to say I can be of assistance in doing just that.



John Paine B.Sc. Dip BIA Global Pacific Corporation Limited P O Box 3229,
Auckland, New Zealand

Email Web site


Please note that all opinions and statements expressed in this newsletter are indicative of my opinion only. Global Pacific Corporation Limited issues no invitation to rely on the information contained in this newsletter and intends by this statement to exclude liability for any such opinion and statement.


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