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USD Might Weaken After Rate Hike; Why You Should Buy Commodities Now
Aspire | 14 September 2015
By: Lim Si Jie
Articles (169) Profile

The world saw its much anticipated wait on last Friday for one of the most watched economic data to be a disappointing one. While the US labour market had improved notably since early this year, adding more than the 211,000 jobs monthly on average for the year to date and 245,000 jobs in July, the August non-farm payroll employment (173,000) recorded 44,000 jobs below Street expectations (217,000).

In fact, the August non-farm payroll was seen as a strong signal whether the Fed would move forward with its plan to raise interest rates in Q3 2015.

Inflation Still Running below Target

While the employment figures are important, there is also another set of numbers that are equally important: inflation figures. The Fed has been aiming towards an inflation of around two percent to ensure that the US economy does not fall into stagflation.

However, with crude oil prices falling to US$45.22 per barrel, the personal consumption expenditures price index (basis for the Fed’s inflation target) rose only 0.3 percent for the year ending June, continuing a more than three-year stretch below the targeted two percent.

Fed Statement in July: Inflation Still Unsure

The minutes from the Fed’s July meeting indicated that the conditions necessary for an increase in the federal funds rate “were approaching” but had not yet been achieved. Fed officials were upbeat in their assessment of the labour market, a view that has been supported by recent jobs data, but were less sure of the outlook for inflation. Although the August figures failed to beat consensus, the positive revision of July’s figures from 215,000 to 245,000 was an affirmative sign for the recovering US economy.

Economists Insist that Sept Is the Right Time

The Federal Open Market Committee (FOMC) have failed to give a clear signal just four weeks before the Sept. 16-17 policy meeting, and this could suggest that the odds for liftoff have declined. But top economists, including those from JPMorgan, Credit Suisse, Wells Fargo, and Deutsche Bank, are still forecasting the first rate hike to come in September, based on near-term forecasts for a rebound in headline inflation, as well as sold employment and overall economic data.

Life after the Much Anticipated Hike: Weakening of the US Dollar

Historically, the US dollar has always strengthened significantly ahead of an anticipated hike in interest rates. After which, the strength of US dollar would then taper off after interest rate has been adjusted.

Between 1993 and 1996, there was a period of relatively flat interest rate followed by an interest rate adjustment. Trade weighted US dollar Index weakened after interest rate was readjusted higher. The same situation happened in 1977-1979 and 1987-1990.

From 2009 to 2015, there was a rather long period of relatively stable interest rate. During the past six years, trade weighted US dollar index also strengthened significantly, especially in the recent years. Should history repeat itself, the US dollar is expected to weaken shortly after the much-anticipated rate hike is announced.

Investors’ Takeaway: Pick Up Bargain Commodities and Commodities-Related Stocks

Image from S&P Dow Jones Indices

There is a strong negative correlation between commodity prices and the US dollar, which means that if one value goes up, the other goes down. Among the different types of commodities, Brent crude and crude oil has the strongest negative correlation against the US dollar.

Based on the relationship between US dollar and interest rates, US dollar should weaken considerably from its current levels after the imminent interest rate hike. Considering the strong negative correlation between US dollar and commodities, commodities should rebound from the six year bear market.

Given the low prices of many commodity-related instruments including stocks and futures, the near term bullishness on US dollar could present bargain opportunities in commodity stocks and futures. This means that investors may wish to buy stocks and futures when they are still relatively cheap.

Still worried about when and how much would the US Federal Reserve hike interest rates? Do you have burning questions that you want to ask regarding the China economic slowdown and SHCOMP nosedive in June? Are you confused if any of the external factors from other countries in Asia will affect your Singapore stocks portfolio?

Catch renowned investors and speakers with rich experience in the stock markets, who have had witnessed multiple stock market crashes and global recessions over the years at Shares Investment Conference 2015!

Speaker profiles

1. Dr Chan Yan Chong, a renowned investor with more than 25 years of experience and the MBA programme director & associate professor of business school at the City University of Hong Kong.

2. Kevin Gin (CFA), the Founder and Principal of Alpha Capital. He was the former COO for CITIC Securities, Head of Singapore and Regional Real Estate Research for Kleinwort Benson Securities Asia (now part of Credit Suisse) and Head of Greater China Property Research with Yuanta Securities (Hong Kong)

3. Louis Wong, one of the most experienced fund managers in Hong Kong. He has over 25-years of solid experience and track record in the financial market. He was awarded Best Financial Analyst for 3 years by the Putonghua Channel of Radio Television Hong Kong and is also a part-time instructor of several investment courses in various Hong Kong universities.

4. Daniel Loh, an investment coach that specialises in equities and derivatives trading, he appears regularly on local TV financial programmes like “Good morning Singapore” and “Hello Singapore”.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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