Where the Money Is Headed in 2010...Part I

By Sean Hyman

To a Forex trader, yield is absolutely everything.

FX traders chase after the currencies with the highest interest rates because they want a higher return on their investment. They also tend to dump currencies with the lowest rates.

This means money floods into the currency with the highest interest rate and pushes up that currency’s value. At the same time, money drains from currencies with the lowest rates, so those currencies tend to drop in value.

And as a Forex trader, I can pair the highest yielders with the lowest yielders to earn the highest profits.

Sounds easy right? Well, there’s a catch.

To earn the biggest profits, you usually need to know which central banks will raise or lower interest rates before they actually make the announcements. Otherwise, you’re just following the crowd.

So today, I want to give you my predictions for where rates are heading in 2010 all around the world so you can get ahead of the curve…

Who Can Expect Inflation?

First of all, central bankers hike rates to tame inflation. So if you want to know who will raise rates next, you need to look at the economies that have inflation starting to make a comeback.

You see, not every country has inflation right now. In fact, only four out of the G-8 countries has inflation right now. The rest of them are still in deflationary mode.

Check it out on the graph below.

Once we have this viewpoint, it really helps us to see where rates are going. For instance, as you can see, New Zealand and the U.K. have the biggest inflation problems right now.

But that doesn’t necessarily mean they will raise rates.

Now here’s something that has many traders scratching their heads. Australia has raised rates THREE times in a row and none of these other inflationary countries have raised interest rates any. Why?

It has to do with how badly their economy is beaten up. You can look to the GDP (Gross Domestic Product) numbers for each country to see which economies are expanding economically and which ones are still contracting.

It’s quite shocking actually when you look at it.

Australia is the ONLY country out of the G-8 nations below that is expanding. In fact, their GDP never went negative in the global recession that we had. Check it out on the chart below.

Australia Is In a Class All of its Own!

Therefore, since Australia is in better shape than the rest of the other economies, their central bankers could raise rates and combat inflation faster than their inflationary neighbors.

So when we put these two pictures together we know that Australia, New Zealand, Canada and the U.K. have inflation. However, Canada’s inflation is far less than any of the others for the moment.

Who Will Raise Interest Rates Next in 2010!

When we look at the GDPs of these different countries we can see that New Zealand could be the next likely candidate to raise interest rates. This it if New Zealand continues to drag itself out of this economic contraction sooner than the others.

Also, the other inflationary countries have farther to go because they are in a much deeper contraction than New Zealand.

It’s also safe to say that Australia will likely continue its rate hike mode on and off throughout 2010. In other words, they will likely hike some and pause some. But overall Australia will be leading the way in rate hikes throughout 2010.

Next up, I’d say that Canada would be next in line to raise interest rates after Australia and New Zealand. Remember, inflation is starting to creep back into Canada NOW. Their economy has been steadily improving lately. In fact, they actually ADDED jobs when their payroll report came out recently.

Not many countries are adding jobs right now, I can tell you. But once again, Canada is charging ahead of its neighbors.

To recap, it’s good to check up on these numbers from time to time so that you can see who’s nearing “economic expansion” mode again. When they have economic expansion AND inflation, you can expect central bankers to really get serious about attacking inflation.

You can easily track these numbers at tradingeconomics.com if you wish. It’s a handy, free site to find all of the central bank’s data all in one graph like we see above.

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