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**RentMaster** · 02-12-2004, 08:49 AM

I have been following the USD recently as well. Anyone who sells stuff into the US is loosing out at the moment. Software is not exempt.

I got this from the ASB bank business report

Outlook. US dollar weakness seems firmly entrenched in the currency market's psyche and as such further weakness cannot be ruled out. But the further the US dollar slides, the more likely intervention becomes.

http://www1.asbbank.co.nz/reports/default.asp?link=http://www1.asbbank.co.nz/reports/bus/

This is an interesting business economic report.

**murray-spi-investments** · 02-12-2004, 09:10 AM

The HK$ is pegged to the $US so your purchasing power will have dropped in line with the $US decline. I can now see the $US declining by 5-20% further over the next 2 or 3 years. The news on Bloomberg recently has finally switched to a highlighting of the commencement in a move by the Asian and Russian economies who are huge $2 trillion? in $US debt into other currencies like euro or national infrastructure investment particularly china. Although US politician still talk of the strong dollar policy everyone now knows it is really one of benign neglect as a means of helping reduce the current account deficiet.

What does all this mean for you.
1. if you repatriate in 3 yr and move you money back here you will get less $NZ than now
2. If you have any Hong Kong properties they would have seen great appreciation over the past year as HK property has finally started to move – I think I read recently 35% over the past year – of course depending on where one is in HK the gains would vary.
3. Your $US denominated Asian funds will increase in $US terms providing the underlying assets invested in grow. As the value of the assets are actually in Asian countries (I presume) then their profits when translated into $US will be higher with a weaker $US. However depending on the companies the fund invests in the $US being weak may either help or hinder the companies growth. I.e. if the companies have a high proportion of exports to the US then it is reasonable to assume that exports may decline as the $US declines. If they import a lot from the US eg industrial machinery, technology then the companies profit may increase as their $US effective purchase prices decreases – unless competition pushes selling prices down.
4. If you want to take advantage of a natural hedge and trust the $HK parity to the $US will remain then investing more into $HK or $US denominated funds will give, I believe strong returns. As over time – probably at least 3 yrs more like 5 the $US starts to move back to it “normal” equilibrium price of around 55c NZ. A move from 70 or even 80C US back to 55c NZ would be a huge increase in your capital if you could hold back repatriating funds until that occurred.
5. Possibly investing in HK property may be worth while. 5 yrs ago was a great time. I do not know the market well enough to suggest anything in HK now.
6. Because your $HK salary is directly convertible in $US it could actually be a good time to invest in selected US stocks probably through sector funds in companies which will benefit from a weakening $US ie exporters and those with large international operations eg GE – general electric. Of course these have had big run ups over the past 18 months on the declining currency. You may want to look at selected US REITS (real estate investment trusts) which are required to pay out all their income as dividends hence have a high yield and would provide that natural hedge as the $US strengthens – the problem here is that REITS have been one of the best performers over the past three years on the back of a yield play and increasing property prices – hence personally I would steer clear unless research showed particular opportunities.
7. You might say that your situation is an example of diversification in action. Your NZ properties have done will especially in $HK exchange terms. While your $HK investment have declined in $NZ terms but possibly have shown better local returns than NZ equities (I just assuming this). Thus overall you have properly done well.

There is so much more one could write here but I will leave it at that. Generally I would say providing you do not need to repatriate your $HK & $US assets and depending on their past performance it may even be worth incrementally (no big lump sums – just average in– don’t try and pick the trend) adding to them over the next few years as the $US declines further. You will be strongly rewarded when the $US strengthens – and it will in time. If your NZ properties are cash flow positive then I would suggest paying off debt for the next year or so till a better picture of price trends develop, you may then wish to buy more.

**ChiefWigum** · 02-12-2004, 04:55 PM

Thanks for the reply Andrew, and Murray.. what can I say but thanks for all that. You've discussed the exact issues that we talk about over here.

I found an article by Mary Holm which was quite good:

Stuff

https://www.stuff.co.nz/stuff/0,2106,3113409a1865,00.html

Yes I do own a property here (bought about a year ago). It has appreciated a huge amount in the last 12 months but things can get very volatile here - almost to the 'gambling' stage when it comes to shares and property. Property prices literally change overnight after news articles! I have friends here who lost NZ$1M in their property value back in '97, yet I have others who have easily made over NZ$1M post '97. I even have a friend who made big time by buying an apartment during SARs and then selling a few months ago.

Your discussion in point 4 is interesting in that you believe that the US$ will strenthen in say 5 years. And that continuing to invest now into US markets will/may have its benefits later on. Sounds logical.

Also under your point 7 you are correct here too. I was lucky in that 1 1/2 years ago I refinanced my mortgages from a NZ bank to a bank over here and into HKD$. The ex rate then was about 4.1 HK$ to the NZ$, now it's 5.56 so my assets in NZ are now in a strong currency and my debt is in a weak currency. Also, my mortgage interest rates are only 2.4%!!! Therefore, these are very high cashflow and capital gains properties. I'm not trying to blow my own trumpet but I believe this sort of info is educational to other readers here of what can be done. Incidentally I bought a property in Jan 04 in NZ but possession date is not until next year (Feb 05); the NZ$ keeps strengthening so in effect this property is going up and up in price before I can even settle! I'm trying to decide which currency to have the loan in (I can switch once a year for free), NZ$ but at a high interest rate or HK$ in a low interest rate. It's all maths really and the HK$ option is probably what I'll do.

I think that upon my return to NZ that I can keep my units invested in the Fidelity funds (Company scheme) until retirement so I have some scope here. The reason for redeeming my JF units would be to make me mortgage free on our return to NZ (but then profit from my HK property should cover that).

Murray you say that you believe the US$ will strengthen later on. Have you read Rich Dad's book I think it was called 'Phrophecy'? Where he's very pessimistic about the US economy and $. Just wondering your thoughts on this topic.

Anyone else who would like to contribute, that would be great; it's all good stuff, and we're only talking two currencies... I don't how these people deal with 3+ currencies!

Thanks,

ChiefWigum

**fudosan** · 02-12-2004, 05:12 PM

I think in the long term a country's current account deficit or profit determines the value of its currency. A country which consistently makes more money than other countries will see its currency value rise. A good example is Yen. With its current account consistently in the red for years, the US$ must come down eventually. By the same token, our NZ current account has been in the red every year since 1974. I do not think the NZ$ can continue to stay high -- without the high interest rate

**murray-spi-investments** · 02-12-2004, 08:32 PM

I hope any one reading this posts finds it interesting I afraid I digressed a bit from the original question but the mind was working overtime and I was having putting fun observations into words

My comment that the $US will increase in time is based more on history than current analysis. Countries typically use devaluation as a way of improving their export sales and to discourage imports. As the currency goes down, the devaluated countries exports increase while imports decrease due to higher retail prices. This kicks whole economic cycle along again. As exporters grow they take on more staff, wages flow into the economy boosting consumer expenditure and increasing governmental taxes. Part of the increased consumer expenditure is directed towards imports and after a few more steps the currency starts to appreciate again. Of course there are mechanisms that governments can use particularly interest rates over the past few decades to impact on currencies. You can be sure that if the US Fed funds rate was 5% rather than 1.75? at present the $US dollars would be much stronger providing other nation’s interest rates were not similar. Much of the reason that $NZ and $AUD are so high is because of interest rate differentials with other developed, high credit rated economies.

To address larger concerns of the world economy then we could say the US however is possibly a harbinger of significant economic change for developed economies. While GDP has shown strong increases over the past 18 -24 months it has been a jobless recovery. So many jobs are being transferred offshore to low wage economies and these include previously high paying technical jobs and every back office position you can imagine that eventually, at the expense of sounding Malthusian major social dislocation may result. Although off shoring jobs is no doubt of financial benefit to corporates at present it is not in the long term beneficial to either corporates or the governments from where the jobs are lost. As an example five or ten years ago when tariffs in NZ were finally removed from imported cars all local manufacture stopped. Apart for the loss of several thousand jobs our current account deficit suddenly increased by hundreds of millions of dollars annually because there was no longer any added value from the NZ input into the cars. The entire cars were imported, albeit cheaper than previously but at a drain of cash from our economy. That cash drain by increasing our current account deficit had increased interest rates we all have to pay from credit cards to mortgages which on the Billions of dollars in personal, business and government debt probably exceeds the gains (economists with access to relevant data and the time feel free to dispute this).

To be fair it would take several pages to explain the potential effects of off shoring and naysayers will say it is no different than other paradime shifts like mechanisation, computers, or even continual productivity improvements. However the central issue is that unlike any of the above changes which resulted in different jobs usually higher paying and attendant down stream jobs eg bank clerks, shop staff, used car salesmen who subsist on wage earners spendable income- off shoring means actual loss of jobs from the entire national economy and hence the complete loss of any cash flow to the economy.

It is difficult for anyone to predict with any accuracy longer term economic positioning. I would suggest that the USA sits in a similar position to Britain 100 years ago. A colossus with worldwide interests headed for a long but inevitable decline. No doubt America will be for the next hundred years a major world player particularly as they have frequently displayed ill-considered willingness to assert their armed strength to “send in the gunboats” (Grenada, Nicaragua, Sudan, Panama, Iraq II) as the English used to do. The difference being that the gun boats today can destroy anything anywhere, so even an economically weakened the USA will be forever formidable. Of course history is strewn with great empires Romans, Greeks, Persians (one of my sons names is Xerxes a Persian king), Egypt, Mongols, Turks, Austro-Hungarian, Holy Roman, English not one of which is now of any real consequence. To be sure those who lived in the decline of Rome over hundreds of years did not a dally basis see great changes in their lives (occasional rape pillage and burn aside), it is usually not until historians examine today’s events with the benefit of hindsight that events become clearer. That the USA has had its century in the sun is I think inescapable, but even if in 50 years it is not the dominant power it is today it will still be big enough to form a significant part of any portfolio and will still have economic swings affecting currency rates.

To digress further: A big unknown in world economies is the potential delinking of corporations from their nominal national base. If the GE’s, Microsoft’s, Boeings, Exxon Mobil’s, become somehow extraterritorial it is difficult to foresee the changes this would lead to. Imagine a corporate entity which can exist forever (think Lloyds of London or Rothschild’s) but with out any direct national control over its activities, rather like the British East Indian company before the Indian mutiny in 1857. Of course each nation where it operates would exercise oversight like in the European Union with their antitrust action against Microsoft resulting in a $US613m. This may stop anti trust but how would you prosecute cases like Enron or WorldCom if the companies were registered in the Cook Islands or nowhere. All individual nations could do is take the local assets – after long court cases- in the individual nation unless concerted cross border action is taken . Companies are so big that with market values like $US300 billion they could easily buy a county - Nauru is probably cheap and do as they wish. After all the biggest 20 or so companies in the world have greater wealth then most countries. Don’t worry I am neither paranoid or a conspiracy theorist I just like exploring what if questions and tying current situations back to history.

**Roger_2004** · 03-12-2004, 06:39 AM

my mortgage interest rates are only 2.4%!!!

Chief Wigwum Wow!

& interesting read Murray!

Thanx to you both

**ChiefWigum** · 03-12-2004, 03:36 PM

I think some banks in NZ let you take out mortgages in foriegn currency (and therefore at different interest rates). BUT, you have to be very careful with exchange rate movements ... your mortgage could go up by 20-40% in a year! (when converted back to NZ dollars). Or it could drop of course.

I'm just lucky that I'm hedged by having my salary in HKD$, and my rents & assets in NZD$.

I've found the best way to get info, hints and ideas on what's best is to talk to my peers. My NZ accountant never advised in this area.

Also, if anyone is after some real good 'down to earth' publications on the 'big picture' of the world markts and the USD$ download the monthly publications or subscribe to Bridgewater Investment Advisors:

Bridge-water.com - 404 Page Not Found

http://www.bridge-water.com/en/section/home/index.htm

He writes in layman terms and it makes good reading.

Cheers.

ChiefWigum

CJ · 05-01-2005, 04:06 AM

Originally posted by Roger_2004

my mortgage interest rates are only 2.4%!!!

Chief Wigwum Wow!

"Interest rate parity" means that if one country has a low interest rate, its currency is meant to move to compensate for that low rate therefore putting you in the same position.

This is economic theory however and doesn't seem to work in the real word - the US$:NZ$ movements and interest rates prove that this doesn't work in the short term.

There are huge risks - image if you wnet the wrong way round with the NZD:US$ - which is why most people hedge this risk by having debt and asset in the same country.

**ChiefWigum** · 11-01-2005, 02:18 AM

Thanks for your comments CJ, all replies welcolmed.

I agree the risks would be high for someone living in NZ, earning their salary AND rent in NZ dollars and having their mortgages in a foreign currency.

My situation is different;
- I earn my salary in Hong Kong dollars, I earn my rent in NZ dollars.
- My assets (about five properties) are in NZ (strong currency) but my loans are in Hong Kong dollars (weak currency and very low interest rates). Sounds like hedging to me!

I do keep a constant eye on interest rates and exchange rates (most of us do up this way anyway). I get a free currency swap per year if I choose (I cannot see any reason to change it to NZD for some time though). I'm making a positive cash flow of about NZD$25K per year (no tax rebate included but includes depreciation claims) yet if I had the loans in NZD then my cash flow would only be a couple of grand. Because of this I'm able to pay off my loans far quicker than if I kept them in NZD (or buy anothet IP perhaps).

One day when I return back to NZ I will seek expert advice on which currency to have the loans in, as I agree with you that the risks will then be a lot higher.

I look at it as compensation for living in this polluted, noisy, expensive part of the world.

Thanks.

**duvetray** · 14-01-2005, 11:04 PM

have to disagree CJ one of the key movements in strength of the NZ dollar against the US has been the interest rate differential, when huge banks who trade millions in Forex each day they need a palce to park there cash and a higher int rate currency is more attractive

CJ · 22-01-2005, 06:45 AM

That is the economic theory though but I must admit there is a hole in my knowledge that makes me agree with you. Our high interest rate makes our currency more attactive so people buy.

Maybe it is based on old world economics (my own term). In the old days, if russia was offering 25% interest, you wouldn't be attacted by the high interest rate as you would expect the russian currency to depreciate by 25%.

Just put it out there as a warning to watch out for a drop in currency. teh Big Mac index however says that NZ is priced about right. Anyone have the latest big mac index (from economist i think). A can of coca cola would be another interesting comparison.

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