How To Play The Chinese Rate Hike

This morning, the People's Bank of China announced it would be raising its key interest rate by 25 basis points, effective tomorrow to combat price stability and curb inflation. The move had been expected, but what was not expected was the timing. Foreign exchange strategists had been expecting the central bank to raise rates this weekend, not in the middle of the week. The move will be effective tomorrow, and will bring the benchmark one-year lending rate to 6.56% and the one-year deposit rate to 3.5%. The interest rate announcement is having a negative impact on commodities and equities this morning, with stocks around the world modestly lower. The interest rate hike will be affective tomorrow, but the market is discounting the move today, as the announcement was made today. This can be seen as bearish for commodities, as China is the world's largest importer of commodities, from iron ore, to copper, to steel, and so on. ACTION ITEMS:

Bearish:
Traders who believe that commodities will continue to fall might want to consider the following trades:

• Shorting names such as Freeport-McMoRan Copper & Gold Inc. FCX could be profitable if copper continues to fall.

• Barrick Gold ABX is another name to short, as gold is likely to see an outflow, as China raises interest rates.

• iPath DJ-UBS Copper TR Sub-Idx ETN JJC is an ETF that is likely to be under pressure today due to the Chinese interest rate hike

Bullish:
Traders who believe that that this is just a temporary blip in the road may consider an alternate positions:

• Traders may want to consider looking at junior gold miners, and can capture all of them with the Market Vectors Junior Gold Miners ETF GDXJ.

• Traders can also add or initiate positions in oil names, as oil is being hit this morning. A name like Occidental Petroleum OXY is likely to rebound, as it tracks the price of crude oil very well.

• Another name to consider is a junior oil company, such as Lucas Energy, Inc. LEI.

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