Where the World's Money Is Headed in 2010...Part II

By Sean Hyman

Want a lesson in earning the biggest gains in the Forex market?

I’m talking about gains as high as 99% - 200% on single trades. Gains that barely seem possible in our 2010 monster-sized Forex market.

I assure you, these types of profits are possible. But you must follow one simple rule…

Rule #1 in FX Trading: You should ALWAYS pair the highest yielding currencies with the lowest yielding currencies.

As you probably know, any Forex trade involves buying one currency and selling another. So if you’re “going long the EUR/JPY” you’re really buying the euro, and selling the Japanese yen.

So if you’re buying the highest yielding currency, and selling the lowest yielding currency, you increase your chances of success.

In other words, you’re pairing the biggest winner currency with the biggest loser. Then you bet on the winner so you have a better chance of earning the higher profits.

As I mentioned yesterday, this all goes back to interest rates and yield.

FX traders usually buy the highest yielding currencies and dump the low yielding currencies so they can get the greatest yield and return on their cash.

The trick is knowing which central banks will hike interest rates next, and which banks are planning to hold off, so you can separate the winning currencies from the loser currencies.

Yesterday, I gave you my list of who is likely to raise rates this year. You can consider those currencies “the winners for 2010.”

Now I want to tell you who is the least likely to have any sizeable rate hikes in this New Year. In other words, this is my “biggest loser” currency list for 2010…

The “Least Likely” to Hike Rates This Year

I wouldn’t expect much out of Switzerland and especially Japan this year.

As I mentioned yesterday, a central bank needs both inflation and real GDP growth to raise rates. Japan loses on both counts. Japan has the worst deflation and some of the worst economic contraction out of the entire G-8 currencies. So they’re last on my list to raise rates.

Now Switzerland is another story. Currently, Switzerland has 0% inflation and -1.5 GDP growth. But the economy seems to be improving. Switzerland could raise rates later on in 2010, but historically, they are known for keeping rates fairly low in proportion to many of the other economies. So they’d go towards the bottom of my list as well.

So who does that leave? The U.S, the Eurozone and the U.K…

The Wild Cards for Rates in 2010

It will be a tougher call on the final three countries left on our list.

In the U.S., the deflation has started to dissipate rather quickly lately. Ben Bernanke and company is bent on re-inflating the economy and they will stop at nothing until they get it.

(By the way, this is one more reason why I think that commodities will continue to flourish in 2010. Bernanke’s going to ensure that there is inflation!)

But back to the U.S., since deflation is disappearing quite swiftly and we’re quickly approaching inflationary mode, the U.S. could start hiking rates in latter 2010.

The U.K. has inflation right now…but it’s gotten hit very, very hard for this economy. In fact, the Bank of England has continued to pump money into their economy (Quantitative Easing) even when many other banks have quit. (By the way, Japan is still in this mode as well.)

Therefore, as soon as the U.K. economy starts to expand once again (growth returning), then they will hike rates quite aggressively. In fact, the Bank of England is one of the few banks in the world that is known for “shocking” the market with rate hikes, etc.

Now on to the Eurozone…

Remember, this central bank has a dual mandate. The European Central Bank is tasked with providing “price stability” and fighting inflation. So they aren’t always as quick to jump on the “inflation fighting band wagon” as are.

Therefore, they will likely ease into rate hike mode later on in 2010 as well. ECB President Sarkozy and the rest of his team don’t like to shock the market. Instead, they like to provide key buzzwords to show their intentions when they can.

Quick Summary of the Biggest Winners and Losers

To summarize my interest rate predictions for you briefly, I compiled a quick list from yesterday and today…

Who’s Likely to Raise Rates First in 2010…

  • Australia
  • New Zealand
  • Canada

Who’s Likely to Raise Rates in the Second Half of 2010…

  • U.S.
  • Eurozone
  • U.K.
  • Switzerland

Who’s Likely to Hold Rates Steady…

  • Japan

So there you have it. I’d consider printing off this list and let my biggest winner and loser list be your guide throughout the year.

But initially, look for the commodity currencies of Australia, New Zealand and Canada to raise rates first. That should kill the U.S. dollar. Make sure you’re prepared.


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