Future U.S. Rates -- And the Aussie Dollar

The future rates implied by markets always offer food for thought. First, let's look at the Fed's target rates expected by the markets, according to Bloomberg:



As most of us would expect intuitively, the Fed is believed to stay on hold his year. Where opinions differ is as to when in 2010 it will begin to increase its rate target by 25bp increments: at its January meeting, or the one in March? In any case, the target rate would be at, or close to, 1% in the middle of next year.

This is consistent with future 90-day Eurodollar rates implied by the markets:



As the graph nicely shows, the rate should approach 1% by the middle of 2010, and be around 2% by the middle of 2011 -- with confidence intervals color-coded with different shades of blue.

Now, comparing futures dollar rates with that of the Australian dollar makes me pause:



By the middle of next year, their interest rates will hover around 4.5%; by the middle of 2011, around 5.5%! The carry trade between the two currencies is not finished; if nothing changes, the AUD will certainly strengthen against the dollar.

To that topic, as an aside: Deutsche Bank has the Euro at USD 1.25 in a year and the USD at 100 Yen.