A Profitable Trade From Australia
Last week the entire global economic system turned on its head. A major event impacted markets all over the world. Yet, the mainstream press essentially ignored it.
The event occurred in Australia. It affected currency, commodity, bond, and stock markets across the globe. No market escaped its impact.
Even your retirement savings and trading accounts felt its reach.
Yet, I’ll bet you didn’t see a single local paper cover it. Only a few financial publications gave the event much notice. And within a day, it was quickly forgotten. What am I talking about?
The Reserve Bank of Australia’s decision to raise interest rates.
Now before you call me crazy, give me two minutes to explain…
I believe this event is one of the most important news items we’ve seen since the start of the recession. This single event tells me more than a week’s worth of newspapers or earnings reports. It tells me the recovery is underway, and it tells me what’s going to happen to the markets.
I’m sure you’re wondering why Australia’s interest rates are so important.
Yes, central banks raise and lower interest rates all the time. But this one move is more important than all the others. Here’s why. We’ve spent the last two years watching interest rates head lower. Now, the trend is broken. Rates are clearly at the very bottom of the curve… and this move signals a change in direction.
Now, I know several smaller countries recently raised interest rates as well. Those aren’t as important. Australia’s different. They’re a major trading partner with Asia… especially China. They’re also a major supplier of commodities.
This rate increase signals to the world that economic growth is accelerating.
Think about it. Australia’s growing because their trading partners are growing. These trading partners are demanding more and more commodities. For the first time since the US became an economic superpower, we won’t lead the world out of a recession. The Chinese have taken that lead role.
It’s already happening.
What’s the impact on other markets?
Let’s start with commodities. Australia’s a major exporter and they’re struggling to meet demand. Commodity producers are struggling to find needed employees. This tells me a floor is being established in commodity prices… so watch for commodity prices to move higher… but that’s not all.
The currency markets are also moving.
Obviously, a rate increase has a direct impact on the Australian Dollar. It makes it more attractive to foreign capital… and that means more investors buying Australian Dollars.
But wait, there’s more.
Once a central bank starts either cutting or increasing rates, they do it in steps. Gradual moves in rates avoid heavy shocks to the system. Take a look at a chart of interest rate changes from any major central bank. You rarely see a “one and done” rate change.
That tells me more rate increases are on their way.
The recent rate increase also reduces pressure on other central banks to keep rates low.
We should see a number of other central banks start increasing interest rates. Remember, as interest rates rise, bond yields will also need to rise to stay competitive. As yields increase, bond prices fall. So if you’re sitting on a ton of bonds, watch them carefully… and start looking for exit strategies now.
The last piece of information is the most exciting. We should see equity markets start moving higher as the end of the recession is confirmed and as growth re-emerges. This is a trend that won’t be limited to Australia. We’ll see its impact around the world.
What this rate increase by the Reserve Bank of Australia tells me is simple… Get long commodities, foreign currencies, and stocks. The next bull-run has already begun!
Category: Bonds
