by Julia Catherine Lee

Created on: October 10, 2009   Last Updated: October 12, 2009

In a move that caught many market watchers by surprise, the Australian Central Bank raised key interest rate by 0.25 point last week to 3.25% , pushing it to the highest among the developed nations. A population of 21 million people, with vast cultural diversity, beautiful coastline, rich in many natural resources, Australia has the highest per capita GDP in the World: $43,000, according to the IMF. Many industry analysts believe the move is a confirmation that global economy has begun to recover and demand for commodities will rise in 2010. Another view among many Asian watchers is that this is very much a preemptive move by Australian Central Bank, known to be hawkish, to be ahead of the curve in anticipation of healthy recovery at the home front. This recent move has led many forex forecasters to predict it is not unrealistic for AUD to reach parity with the US dollar in the near future.

The question then begs: which is the next country likely to follow suit? There are three likely contenders: Canada, New Zealand and the United States. Of the three, US is widely seen to be the least likely to raise rate near term. A weak dollar is good for American companies who have shifted much of its manufacturing base outside the US, boasting company's income when these revenues are converted. Despite frequent rhetoric for a strong dollar by Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner, many do not believe such a move is imminent until the world's largest economy shows an increase in private sector employment and signs consumers are starting to spend again. The biggest argument against an interest rate hike is the depressed US housing sector and a second wave of foreclosure expected to hit the industry. All these headwinds work against interest rate hike by the Fed before 2nd quarter 2010.

Canada, on the other hand, is a very likely candidate. Having said that, the Bank of Canada, in its attempt to quash such rumor in the market, has recently made public comment against such a move. This on the heels of a surprisingly good job number in September which led many industry watchers to chime in loudly on the Canadian loonie reaching parity with the US dollar again. A strong mining sector, backbone of the Canadian economy, can only support the parity argument as economies around the world make progress towards recovery. As the risks of inflation grows, many believe that the Canadian Central Bank may be forced to raise key interest rate soon especially if its domestic economy continues to show strong growth in the coming months.

The next contender is the New Zealand dollar. A country of idyllic landscape, vibrant tourism industry and strong exports from the dairy sector New Zealand has bounced off from its worst recession in decades with its GDP finally growing at 0.1% in Q2. After contracting at 0.8% the previous quarter, the country saw its export grow at a healthy clip of 4.7%. Its close proximity to growth economies in Asia means New Zealand stands to benefit greatly from recoveries already underway in that part of the world. As a result, traders have been quietly bidding up the New Zealand dollar following its recent notch higher in light of positive outlook for its economy going forward. A rate hike is expected to be sooner than later in this picture perfect country of 4 million people, twice as many sheep and one that boasts of world famous Sauvignon Blanc in the beautiful Marlborough region of the South Island.

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