The first inflationary factor is wage increases. If wages rise, inflation is likely to be right behind. The second is producer prices. This is the wholesale price. If these prices rise, then consumer inflation is most likely right behind.
Finally, if consumer price rises are above gross domestic product, you will feel inflation. If we see two signs, such as wages and producer prices spiking, then chances of inflation are even stronger. If all three are sharply up, the suggestion is that inflation is already there and strong. (pity the RBA has no clue)
Here is where the major economies stand now.
This first factor suggest that the seeds of inflation are planted in Australia. The numbers also suggest that inflation is likely to be less strong in Europe as in the US.
Wholesale Price Increases:
Once again we can see a strong inflationary trend in Australia. This means a chance for a higher Australian dollar interest rate.
Retail Price Increases:
The numbers above show the Australian dollar having stronger inflationary patterns than the other major currencies and Japan having the least.
This suggests that interest rates are very likely to rise here, and unlikely to rise in Japan. There is an opportunity here. By going long AUDJPY, that is, borrowing yen @ near zero interest, and depositing the funds in Australia for around 5.5%, a profit can be made.
Some forex brokers allow 100x or 200x leverage. This means if you take $1,000, it will be margined up to $100,000 (for this example). Now we 'invest' in AUDJPY. We borrow 86.5 x 100,000 = 86.5m yen @ 0.1%. This costs $100 p.a. We deposit the funds in Australia (this is actually redundant) and receive 5.3% p.a. This gives us interest of $5,300 p.a. Also, we are paid interest on the $1,000 margin giving an extra $53 p.a. So overall:
lending cost - $100
margin interest - $53
deposit interest - $5,300
net total - $5,247 p.a
on our $1,000 outlay, this is a return of 525% p.a.
There is of course currency risk. If AUDJPY falls, we can lose money. Currently AUDJPY is 86.5. If it fell 2% to 84.77, we are down $2,000. If this happened after 6 months, we would have collected $2,624 in interest, so would still be $624 ahead.
But.....currencies with positive carry tend to trend upwards. History shows that most likely, AUDJPY will rise over time. A 20% rise in the currency would add $40,000 profit on top of the interest.
Another risk is that rates do not move as predicted. If rates stay put, thats a good thing. If Aussie rates rise and Japans dont, thats a VERY good thing. If Japans rates and Aussies rates increase the same amount, thats a bad thing. The only bad thing, is if Japan rates rise more than Aussie rates. This is possible, but not likely. It is also possible that 2 yrs down the track rates have changed and AUDJPY has fallen, but interest collected matches the amount lost.
So you can see why this opportunity has a positive expectancy.
I will be setting up such a trade shortly. My broker Oanda has a 50x margin, and spreads on interest rates are good but not the best. I want a broker with the best spreads and highest margin. ACM offers another 0.2% in interest and 100x margin.
I plan to buy 200,000 AUDJPY, margin costing $2k. I will deposit $12k to cover a possible 2% fall. After a few months, I will begin pyramiding the position.
This will pay me $10,476 p.a.....excl any capital gains. Also, it kind of insulates me against my mortgage.