The Federal Reserve shocked traders and investors alike last week as it hiked the discount rate by a quarter of a point. (This is the interest rate that the Fed charges banks as they get loans from the Federal Reserve.)
While the main interest rate wasn’t hiked, it did spur speculation that the Fed may have to raise interest rates sooner rather than later.
Even though the economic growth outlook has been anemic, inflation has still been growing overall.
If inflation continues to grow, the Fed will have to fight the inflation by hiking interest rates.
If rates are hiked, it will hit stocks hard due to the effect that high interest rates will have on corporate profits and business expansion.
When this happens, traders will run to the dollar and the yen for refuge. In fact, this is already starting to happen to some degree, in preparation for the tougher times that many see coming.
As an example of this, when the Fed hiked the discount rate, the Bank of New York Mellon Corp. noted that clients were buying the yen three times more than they typically do.
This is a huge sampling of clients because this bank is the world’s largest custodial bank with more than $20 trillion in assets under administration.
I also find it interesting to note that they reported that the selling of the euro that day was also about triple what was normal. There was even some heavy selling in the Australian dollar and Norway’s krone.
This tells me that traders and investors alike are already starting to flee the assets that appear to be riskier and they are running more to the defensive assets like the yen even now (in preparation for the tougher times that many savvy investors see coming).
I also believe that these savvy traders are making the right move.
It’s only a matter of time before the Obama tax hikes, high unemployment and high interest rates that are to come will crush corporate earnings once again.
When this happens (and it won’t be long from now), the stock market will correct severely. Money will run out of stocks and emerging markets and into the dollar and the yen. It will surely continue to run away from the euro.
However, my Money Matrix Insider members will be enjoying some hedging as we take advantage of the stock sell-off through being a buyer of these defensive currencies that flourish in the tough times that are coming.
In fact, one of our most recent trades (short EUR/JPY) made more than 356 percent. A “long dollar trade” with USD/CHF reaped another 92 percent. That goes a long way toward the recent pullbacks that my subscribers may have experienced in their stock portfolios.
So make sure you are covered and have a way to hedge some of the downside, like we’re doing, once stocks start to fall even further.
© 2013 Moneynews. All rights reserved.