This year, the Fed has been aggressively raising interest rates in an effort to tame inflation.
But it’s had a negative effect on the stock market. So, investors would love to see the Fed signal an end to their rate hiking spree.
Unfortunately, it doesn’t look like the current era of restrictive monetary policy will be over anytime soon.
In his speech last Friday at Jackson Hole, Fed Chair Jerome Powell was adamant that the U.S. central bank would do what it must to restore price stability… even in the face of a slowing economy.
The stock market reacted predictably and has dropped as much as 7.4% since Powell made his comments.
And with September historically being the worst month of the year for stocks, investors should prepare for more pain to come…
But what’s bad for the stock market has been incredibly positive for the dollar.
On a year-to-date basis, the S&P 500 (SPX) is down 16.1%, while the U.S. Dollar Index (DXY) is up 14.5%.
Currently, there’s a strong negative correlation between the two markets.
On the chart below, you can see how the dollar and stocks have diverged…
The dollar has continued to rally strongly even as the stock market topped out at the beginning of the year.
In fact, buying the dollar has been one of the best trades of the year so far.
Apart from outperforming the stock market, the buck has also beaten gold and bitcoin (down 4.16% and 52.47%, respectively).
That’s why trading foreign exchange (forex) is one of the best moves you can make for your investment portfolio.
Simply staying in cash isn’t the same thing as actively trading forex.
And with inflation taking a big bite out of your purchasing power, it doesn’t make sense to be sitting with a large idle cash position either.
However, by trading forex you have the benefit of tapping into substantial amounts of leverage.
All forex brokers offer their clients leverage. In the U.S., forex brokers can offer up to 50x leverage… While typical stockbrokers can only offer margins around 2:1 on your capital.
With forex offering dramatically increased leverage on positions, the profit potential can be substantial.
Put simply, it doesn’t take much capital to trade large positions with such margins.
For example, with just a $10,000 account you can control up to $500,000 of assets.
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Let’s say you’re thinking of trading the euro/dollar (EUR/USD) currency pair and you have $10,000 in your trading account.
You don’t want to overleverage yourself, so you decide to use only half the total available leverage for a net position size of $250,000 ($10,000 X 25).
Now let’s say your trade was profitable and you managed to capture a 1% movement in the currency pair in one day.
Your gain on this trade would be a cool $2,500 (0.001 X $250,000 = $2,500).
While this trade might be hypothetical, the move in the market certainly isn’t.
On September 1, EUR/USD traded lower by as much as 1.45% in just one day.
The forex market is moving in a way I haven’t seen in years. And if I’m right, then this kind of energy is here to stay for several more years.
That means there are great forex trading opportunities every week, regardless of whatever the stock market is doing.
So, if you’re looking for real diversification in your investment portfolio, then it’s not too late to take advantage of the best trading market out there right now.
Happy (forex) trading,
Imre Gams
Analyst, Market Minute
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