Currencies From Around The World Continue To Fall

Today (Tuesday) the Bank of Canada lowered its interest rate to 1% down from 1.5% formerly. It seems that every major central bank around the globe is inching closer and closer to a zero interest rate policy as they try to revive their economies along with the larger, global economy.

It used to be that currencies chased “high yields”. However, as central banks around the world are aggressively cutting rates, will there be such a thing as a major high yielding currency later on this year?

Most central banks have moved their rates to 2% or lower (most are much lower). The ECB has Europe at 2%, the U.K. is at 1.5% (lowest rate ever), Canada 1% (lowest rate ever), the U.S. is at a “range” of 0% to 0.25% (lowest ever), the Swiss franc is at 0.50% and Japan is at 0.10%.

The only high yielding major currencies left are Australia at 4.25% presently and New Zealand at 5% at present. However, both countries are still considering lowering their rates aggressively too (especially New Zealand).

As high yields become “extinct” for 2009, here’s what matters the most now!

If currencies normally chase high yields and there are no more “high yields” left later on this year, then what will be a “metric” that can be focused on?

Trade surpluses or Trade deficits will likely be the next focal point. There are only two major currencies with sizable trade balances. They are the Switzerland and Japan. The Swiss have a current account surplus of 8% of their GDP (quite sizable in light of the current global economic turmoil). Japan has a surplus of 3.8%.

As a side note, one minor currency…Norway has a trade surplus that is 16% of GDP. Wow! So the Norwegian krone could be helped by that fact in addition to these “majors”.

So until the banks in the U.S. and around the world start to lend once again, these facets will probably reign supreme.

In fact, Obama has talked about a tactic that circumvents the banks since they refuse to lend right now as he proposes some money that may go directly into communities and to individuals and bypass the banks all together. Wow! That would be an interesting approach.

While I’m not an avid Obama fan, I do wish him well. I do believe he has some of the best minds on his economic team. I’ll give him that much. He’s been smart enough to surround himself with the likes of former central banker Paul Volcker and Warren Buffett.

One thing about Paul Volcker is that he’s had a great track record of turning things around when the U.S. was in horrible shape. Let’s see if he can do it again.

In the mean time, look for trade surpluses to mean a ton more than even they typically do as interest rates around the world come crashing down. This helps the Swiss franc (CHF) and the Japanese yen (JPY) for now.

However, once this all turns around and things finally settle down, the focus will go back to fighting inflation with the raising of interest rates once again and the “high yielding” game will be back in vogue. But at this point we have to get back to inflationary environments in order for there to be something to fight! Once that happens, renewed interest will come into the euro and Aussie dollar in particular.

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