Wednesday, March 3, 2010

Traders Eye Canada, Australia for Hikes

(The Globe and Mail)

With the Bank of Canada yesterday dropping a few more hints about when it might start raising interest rates, the guessing game is back on in the foreign exchange market: What currency will be next to cash in on rate hikes?

The question is a key one for forex traders, as differentials in interest rates present “carry trade” opportunities - in which traders borrow in one currency and invest in another in order to profit off the difference in the interest rates paid on the funds. Carry trades are a key driver of trading demand among global currencies.

Traders see the world’s major industrialized economies - the United States, Britain, Japan and the European Union - as certain laggards in the upcoming global cycle of rate-raising, as their domestic economies work their way through lingering credit headaches and heavy debt burdens created by massive stimulus spending.

That opens the door for some other currencies more leveraged to the strongest areas of the global recovery - emerging markets, commodities, exports - to move to the forefront, as the growth potential in many of these countries points to earlier rate increases. Read more here.