Konstantin Boykachev

CEO Proforexea LLC

Honest Coder

Professional Trader

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Konstantin Boykachev

CEO Proforexea LLC

Honest Coder

Professional Trader

Blog Post

Using interest rates in trading

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Interest rates of the Central Banks of the world’s largest countries are the basis of trading on the Forex market. Most of the price fluctuations arising during trading depend on the dynamic changes in this indicator. The formation of interest rates is influenced by both global political and economic factors and domestic events. And every trader should be able to predict market behavior based on changes in interest rates. Of course, if he does not plan to trade at a loss.

Interest rates: the basics

The bulk of traders who actively use information about changes in interest rates in their trading forecasts choose intraday (short-term) trading options. In this case, the profit will be directly related to the growth of the rate of return – the higher it is, the more percent of profit will be received as a result of investment.

Of course, in addition to changing rates, it is worth considering other factors of influence. For example, exchange rate fluctuations that can completely change the picture of intraday trading.

Buying currencies with high interest rates at the expense of foreign exchange funds with lower rates is an attractive option, sometimes highly profitable, but there is no need to expect a guaranteed profit from it – forecasts based only on one specific indicator are too fragile.

The dynamics of changes in interest rates is also effective as an analytical tool for long-term forecasting. True, here it is worth additionally considering such auxiliary factors as the release of economic and political news. But, in general, monitoring changes in interest rates is a completely effective method of analysis that allows you to get a fairly objective idea of ​​the upcoming changes in the market situation in the short and medium term.

Analysis of the dynamics of interest rates

The policy of any central bank presupposes artificial regulation of the financial and economic situation in the domestic market. Accordingly, the main attention is focused on changes in short-term values ​​of interest rates that determine the conditions for interbank lending. The increase in the interest rate is a measure designed to lower the current inflation rate. A decrease in rates entails an increase in demand for loans and an overall increase in investment in the economy.

What changes can signal an upcoming revision of rates:

1) increase / decrease in the rate of inflation in the consumer sector;

2) growth / decline in indicators of the level of expenditures within the consumer market;

3) growth / decline in the level of employment of the population;

4) dynamic fluctuations in the indicators of the subprime credit market;

5) changes in price indicators in the real estate market.

Interest rates: forecasting

When making forecasts on the dynamics of changes in interest rates, it is important to correlate the obtained analytical data with the Fed’s forecasts. Otherwise, everything is quite obvious: with the growth of economic indicators, interest rates can either stabilize or rise. With a decrease in the level of economic development, the state usually lowers interest rates, activating the lending market, attracting new clients to it.

In addition, there are two objective factors that can herald a change in interest rates:

1) statistical data and forecasts of analytical agencies;

2) statements by officials that have a significant status for the economy.

Among the official statements, in the case of forecasting changes in interest rates, the speeches of the heads of Central Banks are of prime importance. It is they who are able to clarify the general mood of the market and demonstrate the presence of short-term trends in the dynamics of the development of price indicators in the near future.

Don’t underestimate analyst predictions either. It is they who, as a rule, have a sufficient level of knowledge and resources to most objectively assess the upcoming dynamics of interest rates. Of course, you should not blindly rely on the opinion of a single professional. Use several sources at once to obtain more accurate information and average the obtained data, organizing them to achieve the desired calculation result.

What interest rates should be considered when forecasting?

1)Federal Founds Rate – relevant for banks whose activities are regulated by the Federal Reserve. Valid for the short-term overnight lending market. Interest rate changes in this case are regulated by the US Open Market Committee. The committee meetings are traditionally held 8 times a year. The traditional day of the meeting is Tuesday (the first and fourth are held in a two-day mode, with a decision on changing the rates on the second day – Wednesday). The final data on the upcoming change in interest rates are announced on the day the meeting ends – at 18:15 GMT.

2) Refinancing Tender – European refinancing rate set by the ECB. Changes in rates for such tenders are carried out every two weeks, on Thursdays. Changes in the frequency can be observed only in connection with the loss of the traditional meeting on holidays or the period of summer holidays for members of the European Central Bank.

3) Bank Rate – the rate of the Bank of England, which is valid for the lending market under the repo scheme (re-sale of assets to the previous owners after a specified period). The decision to change interest rates is made monthly, within the framework of the meeting of the Financial Policy Committee. Traditionally, the committee meeting is scheduled for the first week of the month (Wednesday / Thursday or Tuesday / Wednesday), the results are announced on the second day, at noon London time.

4) Overnight Rate Target – the rate of the Bank of Canada, which determines the desired level of the short-term depositary market. The decision to change the rates is made by the Council governing the National Bank. The data becomes publicly available on the day of the meeting.

5) Three-month loans (3 Month Libor), the corridor of rates for which the Swiss National Bank sets. In this case, the rate can be changed on a daily basis. However, they will all occur within the specified range. Changes in the range of the rate corridor are made on a quarterly basis, traditionally on the third Thursday of March, June, September and December.

6) Official Cash Rate is the main interest rate used by the Reserve Bank of New Zealand. The revision of the rate is carried out 8 times a year, with the announcement of the results on the same day.

7) Repo Rate – the base interest rate of the National Bank of Sweden (acting within the framework of weekly borrowings), is set six times a year at meetings of the Bank’s Council.

8) Cash Rate – the base interest rate of the Reserve Bank of Australia. Decisions to change rates are made at monthly (except January) meetings held on the first Tuesday of the month. The data on the decisions made become available on the day of the meeting.

9) Overnight Call Rage Target – rate on overnight borrowing, applied by the National Bank of Japan. Rate changes are set monthly as part of traditional meetings.

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