Profit from Diverging Monetary Policies

Profit from Diverging Monetary
Policies
By www.TheForexNittyGritty.com

How can a currency trader profit from
diverging monetary policies of the
major world economies?
http://www.theforexnittygritty.com/forex/profit-from-diverging-monetary-policies

The United States Federal Reserve
finally ended its stimulus program and
is expected in the near future to raise
interest rates.

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As noted in Reuters stocks were a bit
lower following publication of the Fed
minutes.

Stocks were down slightly Wednesday
afternoon following minutes from the
most recent Federal Reserve meeting
as investors weighed expectations of
when U.S. interest rates may rise.

Minutes of the U.S. central bank’s Oct.
28-29 meeting, where policymakers
decided to finally end their bond-buying
stimulus, indicated a debate
among policymakers over the outlook
for inflation and the economy.

Following the release of the minutes,
U.S. short-term interest-rate futures
traders were still betting on a first Fed
rate hike by September next year.

The point is that raising interest rates
may bring stocks down a bit as paying
interest on loans a cost of doing
business.

However, raising interest rates in the
USA will drive up the value of the US
dollar in relation to other currencies.

Not all nations are raising interest
rates. In fact, with recession in Japan
and another recession threatening in
Europe it can be expected that rates
will fall in both economies.

So, how can a Forex trader profit from
diverging monetary policies?

There Is Already Movement

The Federal Reserve and other
central banks are in divergence mode
and for good reasons.

The EU and Japan are in or flirting
with recession and the USA is moving
further out of economic troubles.

The US Federal Reserve is expected
to raise interest rates to hold back
inflation while Japan and Europe may
be forced to open credit even farther
with lower rates.

The dollar hit a seven-year high
against the yen on Wednesday ahead
of Federal Reserve minutes that could
shed more light on the divergence in
monetary policy between the U.S.
central bank and its major global
peers.

The yen was on the defensive, falling
to a six-year trough against the euro,
after Japanese Prime Minister Shinzo
Abe postponed a sales tax hike in a
move seen as supportive for stock
markets but negative for the Japanese
currency.

The dollar rose as high as 117.65 yen,
its highest level since October 2007,
and was last trading at 117.55 yen, up
0.6 percent on the day.

The euro was up 0.7 percent at
147.515 yen, its highest since late
2008.

The effects of diverging monetary
policies are already being felt.

Although the Fed merely ceased
buying bonds this last month they are
likely soon to start inching up
borrowing rates which will in turn drive
up the dollar.

How to profit from diverging monetary
policies may well be to buy dollars and
short both Yen and Euros now, before
rates actually do go up.

Capital Flow into the USA

As Europe, Japan and China lower
interest rates the dollar will go up.

Besides simply buying dollars to profit
from this rise one can also invest in
the USA and US markets prior to the
real rally of the dollar.

Seeking Alpha has an insightful article
about the dollar bull market and
global equities.

US has emerged from the great
financial crisis in better shape than its
developed counterparts and the dollar
is set for major bull run.

Evidence shows strong correlation
between dollar rallies and
outperformance of global equities.

European Healthcare and Pharma
sector is one of the best ways to play
the theme, given their dollar earnings
and stand to benefit when Euro
weakens.

After being in the back seat for much
of the 2000s, the US dollar is back in
action and at multi-year highs against
the euro and yen.

Improving US economy would push
the dollar higher as the Federal
Reserve (Fed) looks poised to raise
interest rates in 2015.

The recent policy divergence of lower
rates in eurozone, Japan and China,
would lead to more capital allocated to
the US markets.

Moreover the rising US energy
independence would reduce oil
imports and shrink global supply of
dollars (from lower current account
deficits).

There may be several ways to profit
from diverging monetary policies.

The best way to start is to realize that
a stronger dollar is coming and that
lots of other currencies and things
denominated in those currencies will
seem cheap.

And, a strong dollar will attract capital
and further stimulate the US economy
and cause the Fed to further raise
interest rates, etc. etc.

Profit from Diverging Monetary Policies

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Profit from Diverging Monetary Policies