Saturday November 14, 2015 - 10:40:27 GMT
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Interest Rates Driving Forex Valuations
John M. Bland
Forex Markets Interest Rate Driven
Foreign Exchange is all about the value of one currency against another, and the cost (or return) on a given currency is its interest rate. Traditionally, forex values have been driven by relative interest rates, but in the wake of the "Great Recession", we have gone through an unprecedented eight year period of near-zero interest rates in major economies. This has seen forex traders turn their focus elsewhere for factors to trade on. Now with a Fed rate hike imminent and the Bank of England starting to wake from an extended period of hibernation, interest rates have started to move and they are impacting exchange rates. When central banks telegraph their future policy moves, financial markets adjust well in advance, so that when an official rate change is announced, the policy statement often only ratifies what has already happened.
You will find three lines in the charts above. The green line is the differential in two-year government bond yield, the blue-grey line is the difference between 10-yr note yields and the grey line is the exchange rate. As shorter-term traders, we focus mainly on the green (2-yr differential) line and the grey exchange rate line. Many like the two-year differential because it amounts to a market forecast of the administered overnight deposit rate set by the central banks. Exchange rates tend to be highly sensitive to changes in the expectations for monetary policy. You can see in the charts how the interest rate and forex markets have been adjusting to mounting expectations for a Fed rate rate hike on December 16.
The upcoming week is a relatively mixed period for major economic data.
-- Monday November 16, JP/DE/ EZ- GDP, EZ-HICP, US- Empire PMI
-- Tuesday November 17 GB- CPI, US- CPI, Industrial Production, NAHB Index, API Crude
-- Wednesday November 18, US- Housing Starts & Permits, Weekly Crude
-- Thursday November 19, JP- BOJ, GB- Retail Sales, US- Weekly Jobless, Leading Indicators, Philly Fed
-- Friday November 20, Ca- Retail Sales, CPI, US- COT Report
Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland
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