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Chapter 21, Part II. The Power of Interest Rates. Page 5

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

    Aug 28, 2009
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    So, speaking about major currencies we might say that currency with greater interest rates has more chances to appreciate over the currency that has lower interest rate.

    Pipruit: Well, that’s interesting. So, it should be an easy way to make money – just buy the currency that has higher rate and you will get your profit! Why have we studied all other stuff? You have to start with that point!​

    Commander in Pips: Oh really? You think you’re so smart and other people like Soros and Buffet are fools, right?

    I do not want to upset you but this is not so simple…

    Pipruit: I can’t believe it! Any time when we find something simple – it turns like “not so simple”.​

    Commander in Pips: …the point is that market already includes in the price the current level of interest rates. What really could shake the market is if interest rates are changing or unchanging, and preferably opposed to expectations. For example, if the ECB gradually reduces rates for a long period, then the market anticipates that it will do it in current quarter also. But if ECB will not do it or even will hike rate – that will be opposed to expectation and will change the assessment of currency – its value, perspective and etc. That happens not only with interest rates, but with other macro data, news and other fundamental information.

    Since we’ve said that shifting from increasing of interest rates to decreasing and vice versa leads to business cycles in economy - so it works as follows:

    Traders do not care much about the current rate, since it already has been priced into the quotes by the market. What they are really interested in – when and how these rates will change. Interest rates, as we said, are one of the major tools of central bank fiscal policy. If some bank reduces interest rate for the long-term it’s no doubt that the moment will come when they will stop doing it first and then shift to rate hiking.
    #1 Sive Morten, Dec 22, 2013
    Lasted edited by : Sep 24, 2016
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