The Currency Shining on $1,200 Gold

(And What’s Coming for this Currency in 2010)

It’s a full-on, risk on week again in the Forex markets. That means once again, traders are pouring into stocks and non-dollar currencies.

Front and center, the Reserve Bank of Australia (RBA) did indeed raise interest rates this week once again. That’s the third rate hike this year for the central bank down under.

The Reserve Bank of Australia (RBA) lifted rates higher by 25 BPS (1/4%).

This now brings the interest rate differential to the U.S., Japan, Canada, and any other countries that nilly, willy, cut rates to the bone, to 350 basis points! That’s a full 3 1/2% more yield for those of you at home keeping score!

In other words, traders have even more incentive to trade their dollars, pounds, yen, etc. for Aussie dollars this week because they’re getting a better return on their capital.

Meanwhile, there are plenty of other factors working in the Aussie dollar’s favor this week. I’ll get to those in a moment. First let’s take a look at the latest moves from the RBA…

They’re Not Broadcasting More Rate Hikes for 2010

The RBA may have hiked rates, but the statement following the rate announcement left a lot to be desired, for anyone looking for indications of further rate hikes by the RBA. The RBA certainly didn’t give traders any warm and fuzzy feelings about further rate hikes as we head into 2010.

That statement tempered the move higher by the Aussie dollar initially. But as the day wore on, I think many Aussie dollar observers realized that the RBA would take the next two months to see what their 75 BPS of rate hikes have done so far.

I think that’s prudent…

The RBA has hiked rates 75 basis points (3/4 %) in the past three months. It’s time to take a break. They need to take some time now to sit back and see what happens.

I also want to crow a bit. If you’ll remember I was all over this rate hike like a cheap suit earlier this year. I’ve been saying for a while now that the RBA would not want to wait until their next meeting in February to hike rates again!

Here’s the key, right here, right now, for their next meeting in February 2010…

Australian inflation data will print about a week before the RBA’s scheduled February meeting. If inflation pressures are rising in the face of 75 BPS of rate hikes, we could very well see the RBA opt for a 50 BPS rate hike.

If inflation pressures are nowhere to be found, then you can pretty much be assured that the RBA will take a flyer at the February meeting.

The Key to Gauging Global Growth

As I’ve said for many years now Australia is the proxy for global growth.

And if the RBA thinks that interest rates need to move higher, then they see growth in the world. They do not want to have to deal with inflation pressures later!

The proof of that global growth comes to us from Asia and from the two 800 lb gorilla economies there! First India – Asia’s third biggest economy grew at the fastest pace in six quarters in the third quarter.

This GDP print probably will motivate the Indian Central Bank to increase interest rates later this month. It looks like the annualized economic growth in India will reach 6% this year! Wow!

No wonder they bought the IMF’s gold! The Reserve Bank of India sees this growth and they see the inflation that will come right behind the growth. So instead of owning dollars, they are opting for gold! Doesn’t that tell you something about your own personal investment portfolio?

Meanwhile, the other 800 lb gorilla, China continues to grow too. China’s manufacturing just grew at the fastest pace in 5-years in November. This marks the ninth consecutive month of manufacturing growth in China.

And guess which economy happens to fuel both India and China’s growth? Australia.

Australia is a major commodity exporter. And China and India are two of Australia’s biggest customers. As both economies continue to grow, they demand more commodities and continue to boost Australia’s economy and the Aussie dollar.

On Top of All That, It’s the Golden Currency Too

Speaking of commodities, Australia also happens to be a MAJOR gold exporter.

Of course, the Big News yesterday was the move by gold to $1,200!!!!! And it hasn’t stopped there! Gold has added more to its price this morning and is trading right here, right now at $1,209!

Remember when gold moved above $1,000, and I said, “Well, now I’ll have to change my thought that I would say to people about buying gold on any dips below $900, to looking to buy gold on dips below $1,000.”

That seems so long ago but in reality. It was just three months ago that Gold moved to $1,000!

As I told my Currency Capitalist subscribers two months ago…

“Gold may have moved past $1,000, but don’t be concerned about adding to your positions now. I truly believe we are about to revisit the late 70’s and early 80’s-style inflation. When that happens, certain assets like gold and gold currencies like the Australian dollar will skyrocket.”

I still believe the Aussie dollar is heading higher today.

But, here’s the key to take for all of next year…

Unless China falls flat on its face, the RBA will be hiking rates throughout 2010. Probably 25 BPS each quarter. That will boost the Aussie dollar even higher.

In other words, this outlook bodes well for Aussie dollar out-performance of other currencies, folks. It doesn’t take a rocket scientist to figure that one out!

That’s it for today! Let’s get this out the door, and get started on our Wonderful Wednesday!
Chuck Butler

EDITOR’S NOTE: This is really just the beginning of gold’s move. Our researchers here at World Currency Watch are seeing a new bubble forming in the markets. When it pops, it could boost gold’s price by six fold. Read all about in Chuck’s latest special report here.