The race to higher interest rates continues around the world. But as of this week, the Fed is still not stepping up to compete.

Like all currency traders, I was listening closely to the Fed’s statement to see if they would remove the easy money policy or show signs of hiking U.S. interest rates any time soon.

And of course they’re not planning on it.

No one can blame them for this, especially considering unemployment is still at 10.2% (as of this morning), banks are still reluctant to lend and the economy is still only floating along on government assistance.

However, on the other side of the world, certain countries are not only winning the interest rate race, they’re preparing to trounce the dollar in the months to come.

As you’ve been reading here in FX University Daily, that includes Australia, New Zealand and Norway. All countries are looking to step up to raise rates (and Australia and Norway have already started the race before the gun went off).

Out of those three currency gems, I’m betting on Australia and the Aussie dollar to rise first as we head into the new year…

My Favorite Currency for 2010…

Now it’s not a secret that I’ve liked the Australian dollar for months. In fact, I wrote you back in July that the Aussie dollar was my favorite major by far.

Also, in the October issue of Currency Capitalist, I wrote to my subscribers…“If I had to pick just one currency to buy for 2010, it would be the Australian dollar.”

So why the Aussie dollar?

Well for starters, Australia offers the highest interest rates of any currency worldwide, so traders will be buying it up in the months to come to gain higher yields. Australia also has a prudent central bank that’s keeping its inflation under firmly under control.

On top of that Australia is the proverbial grocery store for all its surrounding countries. With its rich commodities, Australia feeds China, India, South Korea and Japan and their host of commodity needs. So as China and her neighbors grow, so will Australia.

Then there’s the gold issue. Australia is a HUGE gold exporter, so higher gold prices do tend to affect the Aussie dollar’s value. As of this morning, gold just hit a new never-before-seen record of $1,100. Nothing but good news for the Aussie.

How to Buy When You Don’t Know
When a Currency Will Rise

As you can tell, I’m pretty excited about the Australian dollar going forward.

But that doesn’t mean there won’t be pullbacks and corrections in the Aussie dollar’s price over the next few months. While it’s easy to see the Australian dollar’s long-term trajectory up, it’s a bit more difficult to time the pullbacks.

That’s why I recommended my Currency Capitalist members play the Aussie dollar with currency options back in October.

Currency options allow you to take advantage of a long-term currency trend, but you can use a bit of leverage to earn even higher gains should the trade go your way.

As of this morning, this currency option is already up a nice 24%. Not bad.

It’s a little late to get in on this option if you’re a Currency Capitalist member, but there are plenty of other opportunities down the line with currency options.

If you’ve never heard of currency options, the Philly Stock Exchange first introduced these gems back in 2007. I call them “stock-like currency options” because the PHLX designed them to mimic stock options as closely as possible.

If you’re familiar with stock options, currency options should be a breeze. Currency options have the same trading times, the same expiration dates, and they’re settled in dollar terms just like regular stock options. Like stock options, you only risk the amount you pay for the option (called the premium). Not a penny more.

The only difference is rather than track an underlying stock, currency options let you place long-term bets on 10 different currencies.

If you’re interested in selling a particular currency, you buy put options. If you’re interested in buying a currency (like say the Aussie or New Zealand dollar), you buy call options.

Best of all, currency options are available through any options-approved stock account. This means you don’t have to open a new account. You just need to call your broker and make sure you’re clear to trade regular options.

As I said in the beginning, the race to higher interest rates has already begun. If you’re looking for a way to play those high-yielders, I would look to options first for long-term currency bets for 2010.

Yours in FX Profits,
Ashish Advani

EDITOR’S NOTE: There’s a good reason why traders call the currency options market the “$71,000 hobby.” It’s because conservative traders are bagging tens of thousands every year with long-term bets on these handful of currency options. In fact, we know a remarkable 77-year-old man from Iowa who’s doing just that. Click here for his full story.