USD Strengthens in the Wake of Delayed Rate Cuts: What Should Traders Know?

The year 2024 is just a month old, and the financial markets are already buoyed by the strengthening U.S. dollar, as compared to AUD and INR. With the interest rate cuts still far off, the strength shown by the USD is on the expected lines. As for February 2024, one USD stands strong against one AUD at 1/1.5372. One GBP is at 0.7921 when compared to the USD.

Trading.biz analyst Rahul Nambiampurath mentions that a strong USD can eventually lower the prices of dollar-denominated commodities like Oil. This belief is validated by the fact that Oil prices fell by 2% once the U.S. Jobs Data surfaced, indicating a possible delay in the announcements related to the interest rate cuts.

How Impactful Could Be the Strengthening Dollar?

A strong USD can have an impact across sectors and themes. For instance, USD can exert pressure on several emerging currencies. Shorting these emerging market currencies might be possible for a trader. Some possible options include RUB, INR, BRL, and more.

As a forex trader, you can even focus on countries that export commodities. A strong USD can offer short-selling opportunities on the currency pairs associated with these nations. The probable picks in this case include AUD and CAD.

A good metric for identifying the interest around the rate cuts would be the 30-day Federal Funds Interest Rate Futures ZQ1!, trading on CBOT. The Futures look bullish, underlining the expectations around a rate cut. Currently, the Futures level is holding steady at 94.695, which accounts for an expected interest rate of around 5.305%. A surge in the 30-day Futures, closer to the 95-level mark, could mean a sure-shot drop in rates. But the chart reveals that the surge might take time.

Here are some of the other sectors and themes to focus on:

1. Short positions in Gold or related ETFs, as precious metals often move opposite to USD.

2. Short positions in Oil and energy commodities

3. Shorting opportunities in the bond ETF space as higher yields can lower bond prices

4. Long positions in the banking space as higher or steady interest rates can increase prices

“As for stock-based trading, it might make sense to focus on small caps with domestic revenue exposure,” mentions Rahul.

Themes and Sectors To Focus on Amid Dollar Strengthening

When the USD strengthens, focusing on domestic themes featuring regional banks and utilities is pivotal, as they are far less dependent on international revenue. For instance, domestic-focussed restaurants like Chuy’s Holdings (CHUY), which rely on local consumer spending, can turn into good bets. CHUY: NASDAQ is up almost 3.62% over the past week.

Apart from domestic restaurants, Defense and Aerospace stocks like AIRI, U.S. Retail options like Hibbett Sports (HIBB), and Healthcare shares like the HROW seem like good picks if the USD keeps getting stronger.