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Chapter 21, Part II. The Power of Interest Rates. Page 6

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 22, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    The major source of information here is regular Central Bank meeting report and testimony of the head of the Central Bank. Information comes not only from rate decisions, but mostly from the speech and character of te release – how does the Central Bank assess the current situation in the economy.

    When the tone of that speech changes, the market starts to price it in and change the value of the currency, even if rates themselves weren’t yet changed. So the market sentiment starts to change and speculators step in more aggressively. If a Central Bank does something absolutely unexpected then it could lead to huge moves on the market.

    Pipruit: Well, that’s great. But, what if rates move in the same direction with some pair, or vice versa – in opposite direction?

    Commander in Pips: Excellent question. Here we should start with investigation of rate differential itself. This is just difference between interest rates of two currencies in pair. Then we have to keep an eye on Central Bank monetary policy. The most attractive pairs to trade from the perspective of rate differential are those that show opposite interest rate movements. Say, increasing interest rate policy on one currency and decreasing on another. These pairs could show really huge swings. As example, we can show such pairs as AUD/JPY, AUD/CHF, GBP/JPY and some others. On second place we can appoint pairs, where any interest rate moving happens just with one currency, and most difficult to trade are those pairs where interest rates change in the same direction on both currencies.

    Using following formula, you can calculate future approximate rate of two currencies that have different interest rates:

    [​IMG]

    For instance, if USD rate = 0.25% and EUR = 1% and current rate is 1.43 then when year will pass rate the fair rate should be: 1.43*(1+0.01)/(1+0.0025) = 1.4406


    Pipruit: Hm, not impressive appreciation…but, may be we have to buy it?​
     
    #1 Sive Morten, Dec 22, 2013
    Lasted edited by : Sep 24, 2016
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