Stock markets are poised to soar or crash as the United States awaits two crucial economic data that will give a clue as to what the Federal Reserve will do with interest rates. And what the US central bank does can have a big bearing on what our reserve bank does here in the months ahead.

For the Switzer Investing TV show last night, I interviewed one of the smartest economists in the country, Michael Knox of brokerage firm Morgans. He’s my trusted man for the Australian dollar. I wanted his perspective on our currency because I want to invest my money and that of my financial planning clients in the eventual rebound of the US stock market.

I learned in the early 2000s (after the Nasdaq index collapsed in the stock market crash) that hedging the Aussie dollar when it’s at a low point and you want to buy US stocks.

After the crash, companies like Microsoft went from $58 to $21. It is now $214. To make money from the eventual rebound in good tech stocks, I invested in the exchange-traded product QQQ which gave me exposure to tech companies in the United States.

It was a smart game, but my winnings were reduced by the constant rise of $A. I’ve learned that when the Oz dollar is low (it’s now at 63 cents US), if you hedge your investments, it eliminates potential currency losses.

That’s why I wanted Knoxy’s best estimate of the $A and what Fed boss Jerome Powell said yesterday actually changed his answer.

He said most economists expected Powell to soften his language and imply that his steep 0.75% rate hikes are helping to reduce US inflation. Instead, he maintained his tough talk.

This pushed bond yields higher, indicating that the bond market now expects US rate hikes to continue longer than expected. This, in turn, will keep the US dollar strong and delay the appreciation of our dollar.

If the talks were more dovish from Powell, we might have thought the rate hikes were almost complete in the US, which would mean the greenback would soon fall and the Oz dollar rise. While that may be delayed until mid-2023, Knox says it will happen.

The timing of your hedging could therefore be key to your short-term returns, but Powell’s comments could be purposely exaggerated, as he doesn’t want to stop scaring American consumers and stock market players until he knows that inflation is really down.

Tonight the Yanks get the latest jobs report and that could be a clue to what’s going on with inflation. If unemployment is rising and employment is falling, then bad news will be good news for those worried about inflation and interest rates. This will also be great news for equities, but this data drop is not as big as next week’s November 10th.

By Friday morning, at our time, we will have seen October’s consumer price index for the United States. If it’s a significantly lower number, the stock market will like it. If not, there will be a big sale.

Hope is never a wise strategy when it comes to investing, but hopefully a good inflation figure will appear next week or in December. If not, we will be caught in this “up and down” phase of equities, which has prevailed since the middle of this year, after a terrible fall in the first half of the year, especially for the American market.

I’m sweating over falling inflation to trigger a surge in stock markets. The chart below shows how the S&P 500 Index for the US equity market rebounded strongly after the selloff.


On the comeback, as Rachel Hunter said in the old Pantene commercial: “It won’t happen overnight, but it will!”

Here is the interview with Michael Knox: