According to the new research note by Richard Grace from the Commonwealth Bank of Australia, it would be better to buy Australian dollar with euro in 2008 to earn from the interest rates difference.
The EUR/AUD currency pair is proposed to substitute the AUD/JPY as the next carry trade investment opportunity, because along with the wide positive interest rates difference its more stable than the yen based currency pairs. The latest development in the U.S. economy also imply that the USD based currency pairs will be of a greater level of volatility.
Currently Australias short term interest rate is at 7.00%, a historically high level for this developed economy, while Eurozones reference interest rate is at 4.00%. This results in a 3.00% yield for those who buy Australian dollars with euro (or sell euro short for Aussie).
While the current difference may seem unsatisfactorily low for those carry trade investors that have used to NAZ/JPY pair (7.75% difference), there is an additional advantage in AUD/EUR a very high probability for both the Reserve Bank of Australia to increase the rates and the European Central Bank to cut the rates soon.
During the last monetary policy meeting on 7th of February, ECB held the rates, but there were signals that it will lower the rates soon. RBoA increased rate the interest rate by 0.25% on February 5, and later the bank officials signaled that there will be another rate hike to slow down the inflation.
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