Tuesday, July 21, 2009

Who’s Cutting, Who’s Holding and Who Will Raise Rates First

By Sean Hyman I’ve heard many traders complain they have to jump from site to site to find out each central bank’s current interest rates.

However, I want to point out two sites that do all the hard work for you: dailyfx.com and tradingeconomics.com. Both of these sites regularly list interest rates from the top eight countries on their home pages. I like simplicity and accessibility, so these two sites definitely fit the bill for me.

As you’ll see from the chart below, most countries are almost at 0% interest rates for the moment…

Only Two Currencies Have Any “Real Interest Rate” to Speak Of!

While both Australia’s and New Zealand’s rates are low for them, they are MUCH higher than most of the pack.

I believe most of these central banks will keep rates where they are for now (especially considering some are “next to zero” anyway).

After all, what good would it really do to lower Japan’s, Canada’s, Switzerland’s or the U.S.’s rates further? Even the U.K. doesn’t have much to work with interest rate wise. So I really doubt they lower rates from here. I’ll tell you why in just a second.

The only ones that have more “real room” to cut are Australia, New Zealand and the Eurozone. But regardless, I doubt any of these countries will cut their rates any further either.

Why do I say that? Look at their inflation numbers. Check out the “year over year” inflation figures below as noted through their CPI readings.

Believe It or Not…Inflation Does Still Exist!

My Top Three Picks for the “First Rate Increases”

Australia has 2.5% YoY inflation. So, in my opinion, they will hold rates steady for now. They really can’t do much else. If they lower rates, they would risk stoking more inflation. I also believe that they will be among the first to raise interest rates when the time comes. In fact, raising could actually be only months away at this point.

New Zealand’s inflation is almost 2% and the U.K. is close to the same as well. So both countries are in my “top three” candidates to raise interest rates as the global economy continues to recover.

Therefore, these are some of the top holdings you should consider. Also, as commodities continue to firm up, it will only help Australia and New Zealand all the more.

You’ll notice that the Eurozone is almost flat (almost no deflation or inflation…yet there is “mild deflation” that does exist). The European Central bankers probably believe any recovery will pull the country back into an inflationary cycle without further rate cuts.

The VERY Last On My List…

By the way, note how bad deflation has taken hold in the United States. As a result, the dollar has been pulverized lately. Frankly, I’m still bearish on the buck going forward.

The “fear cycle” is now over that helped the greenback. Now that investors are turning back to the true fundamentals once again, the buck becomes the ugly duckling of currencies yet again…with Japan and Switzerland not far behind!

This is yet another reason why I DON”T believe that the U.S. dollar will prosper upon an economic recovery. Because, in the currency world…it’s not “are you recovering” but “who’s recovering the best.” In other words, it’s always a comparison game.

Australia is already starting off better and currently has inflation. So why wouldn’t the Aussie continue to rise as inflation rises, GDP growth increases and rate increases power it ahead …while the buck finally pulls back in inflationary mode later on? It would!

Therefore, I see the “commodity dollars” powering ahead of the U.S. dollar and yen and Swiss franc as the global recovery continues. In other words, the carry trade is back.

Happy Trading!
Sean Hyman