Money in Motion

The Potential Rate Hikes You Haven't Noticed

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While you've been busy watching the U.S. debt crisis unfold, there's a nice trading opportunity shaping up down-under.

Australia and New Zealand could be raising interest rates any time now, this strategist says, and the markets haven't noticed.

Those lands down under sure have been posting some robust economic data lately. Growth and confidence data from New Zealand has been solid, and in Australia, the latest CPI figures suggest inflation is running at a nice clip.

Analysts at Royal Bank of Scotland think interest rate hikes are on the horizon in both countries. In New Zealand, the central bank has hinted that it will reverse an earlier emergency rate cut. Also, the analysts wrote in a note to clients, "Rates are at record lows, inflation and inflation expectations are running near the top of the 1 to 3% target band, growth and confidence are on a strong path, and the RBNZ is looking down the barrel of a big construction boom over the next two years."

In Australia, meanwhile, markets have been pricing in a possible rate cut, but the RBS analysts think the CPI data will persuade the central bank to move faster than planned on raising rates. Both situations should be bullish for the Australian and New Zealand dollars.

The two countries' close ties to Asia are also bullish, the analysts say. "The market is increasingly looking to Asia as relatively safe and its currencies, markets and economies are seen as resilient to problems in the North Atlantic."

In contrast, there is little or no good news to look forward to for the U.S. dollar or the euro . The debt crisis and a possible downgrade are already roiling the dollar. And the RBS analysts see mounting problems on the horizon for the euro. Implementation of the bailout plan for Greece is running into headwinds, and is seen as "not sufficient to restore confidence," they say. They're also troubled by the rising yields on Italian government bonds. 

RBS recommends selling the euro against the Australian dollar at 1.301, targeting 1.20 by around the first quarter of 2012, with a stop loss on a two day close above 1.35. They also suggest selling the euro against the kiwi at 1.650, targeting 1.50 by around the first quarter of next year, with a stop loss on a 2 day close above 1.70.


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