Why The Aussie, Not The U.S. Dollar, Is The Way To Play A Fed Rate Hike

Blake Morrow was recently a guest on #PreMarket Prep, a daily trading idea radio show hosted by Joel Elconin and Dennis Dick.

On Benzinga's #PreMarket Prep, Wizetrade Chief Currency Strategist Blake Morrow said that he expects the U.S. dollar to rally following any Federal Reserve interest rate increase this year. However, the strategist's favorite trade is not U.S. dollar-denominated at all. Instead, Morrow recommends buying the Australian dollar against European currencies, particularly the Swiss franc.

In doing so, traders would not only be playing for the Aussie dollar's appreciation, but also be earning positive interest rate differential between the 2 percent yield in Australia and the negative 0.75 percent interest rate in Switzerland – a 2.75 percent differential.

And this global interest-rate differential is what will matter, Morrow suggested.

Morrow called this one of his "more favorite trades."

With ETFs, traders could go long Guggenheim CurrencyShares Australian FXA and short Guggenheim CurrencyShares Swiss FXF to mimic this trade. This trade would run counter the year-to-date performance of each of these ETFs.

The Australian dollar has lost 10 percent of its value, while the Swiss franc has gained 4.2 percent.

On interest rates in the U.S., Morrow said that much of the timing and pace of any increases would depend upon the market's reaction. He said that "rates can go up rather quickly" if the market reacts right.

That pace of increases –- particularly when put against the backdrop of central banks elsewhere that are lowering interest rates –- could help the U.S. dollar resume its rise.

One such way to go long the dollar would be to buy the WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU.

Year to date, that ETF has gained 5 percent.

Posted In: Benzinga #PreMarket PrepBlake MorrowWizetradeLong IdeasForexTop StoriesExclusivesMarketsTrading Ideas