Why Inflation Is A Good Thing

• faithmight
• February 15th, 2011

China’s inflation came in high today. The UK’s inflation came in high today. Gas prices are high. Food prices are high. And the only ones happy about it are currency traders.

Inflation sucks as a consumer especially when wage inflation is the only cost (to employers) that doesn’t seem to be rising. But when inflation ticks up in countries, their currencies go bid.

The market believes that the Bank of England will respond to inflation that is now double their official inflation target. The People’s Bank of China will have to continue hiking rates if they don’t want to risk being the next Egypt (or Tunisia or Yemen or Algeria or Iran or Jordan or Sudan or Ivory Coast). And tighter monetary policy means higher interest rates which means increased capital flows as investors look to obviously park their cash in notes with a higher rate of return. Other central banks around the globe are already hiking interest rates.

• Peru Central Bank Raises Interest Rates 25bps to 3.50%
• Central Bank of Armenia Raises Rate 50bps to 7.75%
• Bank Indonesia Raises Rate 25bps to 6.75%

This new shift in central bank sentiment in response to higher and higher inflation is a real opportune time for traders. The beginning of the trend is always the most lucrative part of the wave. So never mind the doom and gloom of the inflation headlines. Know how your pair responds and trade accordingly.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: cable fundamentals, fundamentals, GBPUSD, global inflation, rising commodities, USDCNY

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