How to Profit From a Potential December Interest Rate Rise

Category: Small Business Borrowing Published: Wednesday, 11 November 2015 Written by Admin

It has been the main topic of discussion amongst investors for more months than I care to mention. "When will the Fed raise interest rates?" has been the question to ask, it seems, after every data release coming from the US. Now, after a series of decent enough figures covering housing, manufacturing and jobless, the release of the Non-Farm Payrolls data on Friday has led many investors to believe that finally, we will see interest rates raised from their historic low in December's upcoming Federal Reserve meeting.

Improved Figures

There have been solid indications recently that the US economy is improving enough for the Federal Reserve to have enough confidence to raise interest rates. Just this month alone already, we have seen the Chicago PMI leap from 49.0 to 56.2, whilst the ISM non-manufacturing rose from 56.9 to 59.1.  Vehicle sales in the US rose-more-than-expected, rising from 18.17 million to 18.24million after analysts had been expecting the figure to fall to 17.80 million. Small business borrowing also increased and the overall US trade deficit narrowed to its smallest it 7 months.

However, it is the unemployment figures that have given Fed Chair Janet Yellen the greatest confidence to raise interest rates for the first time in nearly a decade. Despite those applying for unemployment benefit rising to a 2-month high, the release on Friday of the Non-Farm Payrolls data showing the lowest unemployment figure since 2008 and the largest single monthly gain of employed persons (271k) for the entire year, has raised the likelihood of a rate rise in December up by a few notches. So, how will this affect you?

Profit Opportunities

We are already seeing investors position themselves ahead of the potential December rate increase with the US Dollar rising to multi-week highs against a number of major currencies. EUR/USD fell to a 6-month low, USD/JPY rose to a 3-month high, USD/CAD up to a 6-week high and GBP/USD fell to a fresh 7-week low. Why? Because a raise in interest rates will mean investors abroad pile into the greenback to capitalize on the higher yields being offered.

I firmly believe that there is more support to be offered to the US Dollar, certainly in the near term, with only Thursday's Fedspeak and Fridays US retail sales report offering any major movement opportunities in a light economic calendar next week.

Medium term, until the next policy meeting by the Fed in December, there will be investors positioning themselves for a rate rise. This will boost the greenback even more and will certainly offer some BUY opportunities against the high yield currencies such as the Canadian Dollar and the Australian Dollar.

Meanwhile, other profit opportunities can be had in the commodity markets. Many commodities are traded in dollars. This means that a strengthening dollar will make commodities such as Gold, Oil and Copper more expensive to buy and less appealing to investors. Traditionally, gold trades inversely to the US Dollar, so when the dollar goes up in value, down goes Gold, offering plenty of profit opportunities by SELLING the yellow metal.

Overall, I expect the Fed to raise rates in December. US retail figures for November and early December will be key, but the economic indicators for the world's largest economy are strong enough that the Fed can raise rates next month. Should this happen, expect the dollar to appreciate further and commodities to decline further, providing simple short and near term profit opportunities for us all.

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