What to Trade as Interest Rates are Going Up

What to Trade as Interest Rates are Going Up

Markets operate in cycles. From 2002 to 2007, the markets had a massive bull run, and central banks kept interest rates high. Australia and New Zealand had interest rates above 8% at that time, allowing traders to partake of carry trades of a lifetime. Then the global financial crisis of 2008 hit. The global downturn created by this event lasted several years, necessitating central banks to cut interest rates and initiate various stimulus programs known as quantitative easing (QE).

These central bank actions had effects on certain financial market assets. After quantitative easing programs ended in the years between 2015 and 2017, central banks began to raise interest rates once more. Financial assets that plunged in value during the meltdown years began to pick up, and those which benefitted from the QE programs began to retreat. This period lasted from 2017 to 2020, when another global cataclysmic event hit: the COVID-19 pandemic.

The onset of the pandemic in March 2020 forced the hands of central banks very quickly. The response was far more aggressive than the QE programs of 2009 to 2015/2016. Central banks cut interest rates to near-zero levels. Some even took theirs into negative territory. This action caused a reversal of the trends of 2017-2019.

With two years gone since the pandemic began, the onset of vaccinations and the emergence of less virulent virus strains have allowed for a measure of global economic recovery. But this has all come at a cost. Central banks' cash splurge to massively stimulate the global economy has led to more money chasing fewer goods and services. Recovering demand, more cash and a reduced supply of goods and services from supply chain disruptions in industries still battling the pandemic's effects have led to global inflation. The onset of the war between Russia and Ukraine in February 2022 has added a new dimension to the situation. In many ways, this war has worsened the scale of inflation. In some countries, inflation is at stratospheric levels, hitting multi-decade highs.

However, the situation has created opportunity, the kind of opportunity seen before the 2008 global meltdown and the immediate pre-pandemic years in a magnified fashion. This is the time for discerning investors to know what they should be trading.

What to Trade in an Inflationary Environment with Rising Interest Rates

With literally hundreds of assets listed on the platforms of the listed brokers on this site, you need to know where the opportunity lies in an inflationary environment where interest rates are rising.

Indices: Nasdaq 100 (US 100); Dow Jones (US 30)

The Nasdaq 100 and Dow Jones Industrial Average are the two indices you should be trading in response to rising US interest rates. The stimulus packages from the US Federal Reserve in response to the COVID-19 pandemic provided easy money that allowed investors to borrow cheaply to fund their stock purchases in a situation where prices had collapsed (March/April 2020 market lows). An unbelievable bull run followed that caused all US indices to break new records. The markets are in correction mode now that the cheap money is gone. Expect more volatility in the months ahead.

Stocks (Tech stocks, oil stocks, metal/gold producer stocks, financial stocks)

Within the US exchanges, you should focus on trading the following stocks:

  • A) Technology stocks

Several tech stocks listed on the Nasdaq 100 are susceptible to risk events, and some are facing regulatory challenges. Google, Amazon, Facebook (now Meta), Tesla, Netflix, Apple, Nio, Nvidia, etc. are all companies that operate in the Technology sector of the US stock market, which will see continued volatility in the months to come.

  • B) Financial stocks

Banking stocks should be on your trading watchlist, and the reasons are not far-fetched. Banks are the direct beneficiaries of any interest rate increases. The interest rate is the rate at which the central bank lends to commercial banks. The money created by the banks is lent to the public at a marked-up interest rate. That is how banks profit from loans and credit facilities. Watch the banking stocks in the US, UK, and Europe and see how they respond to the changing interest rate environment. There are plenty of opportunities here.

  • C) Commodity Stocks

The changing interest rate environment, the war in Ukraine and attendant sanctions on Russian entities has created a situation of volatility in crude oil prices, gold, silver and other industrial metals such as platinum and palladium. Companies that produce these metals, such as Rio Tinto, Glencore, BP, Shell, Tata steel and a host of others, will constitute a list of commodity stocks you can trade on the MT4 platforms of the brokers listed on this site.


Interest rates may be going up in some countries, but not in all countries. Some countries have unique situations that mean their central banks cannot raise interest rates without upsetting their entire financial systems. At these times, it is pertinent to identify these countries and trade the pairs that reflect the best interest rate differentials. Japan is one such country. The central bank has maintained the most dovish stance of all major central banks for the past 24 years. The pandemic allowed the Bank of Japan to double down on its low-interest policy along with the addition of more stimulus to shake the pandemic effect off its economy. As interest rates start to rise in inflationary environments elsewhere, the Bank of Japan remains resolutely dovish. It has indicated it is not in a hurry to raise interest rates any time soon. This situation creates interest rate divergence in pairs such as the USD/JPY, GBP/JPY, AUD/JPY and NZD/JPY. These pairs were at the centre of the carry trade opportunities that existed just before the global financial crisis of 2008 triggered dovish monetary policy worldwide.

The USD/TRY is another pair you should consider trading. A bizarre interest rate policy has battered the Turkish Lira. With inflation above 73%, one would have expected the Central Bank of the Republic of Turkey (CBRT) to have hiked interest rates most aggressively. However, the bank has decided to dance to the tunes of the country's president, Recep Erdogan, who has consistently maintained that the bank should keep cutting rates. While the bank has not reduced rates in a while after an aggressive rate-cutting cycle in 2019/2020, the bank's current 14% one-week repo rate means that the real interest rate is in negative territory. This has provided an opportunity to trade the USD/TRY based on this divergent interest rate policy.

Other pairs that make it to this list include the USD/MXN and USD/INR pairs. While the fundamentals of these pairs are not strictly tied to ongoing global inflation, they are interwoven with the Russia-Ukraine conflict and the impact this conflict is having on energy prices. So as it were, these two pairs are sensitive to energy product inflation. With the threat of Russian oil being boycotted, the price of crude oil is now in the three-digit territory. The situation has also created an environment for increased prices of crude derivatives such as diesel, petrol (gasoline), cooking gas, kerosene and others. Mexico is a net exporter of crude oil, while India is a net importer of crude oil and, indeed, the third-largest in the world behind the US and China. India's crude oil product consumption is 5% of global production. While the US produces crude oil and maintains a rising interest rate environment, India is a net consumer, and the Reserve Bank of India's interest rate policy has been more conservative. Trading the USD/INR based on divergent rate policy and crude oil price dynamics is possible.

Closing Note

The central banks aim to continue raising rates until global inflation is controlled. However, there are concerns that if rates go up too high and too quickly, this could trigger global recession fears. This, in itself, will trigger more market volatility, especially in the assets discussed here. There will be loads of opportunities for traders to profit from the situation. If the inflationary situation impacts you, at least trade these assets and try to get more funds to mitigate your situation.

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