The difference between countries' interest rates (the bond spread) can influence the movements of currencies in the FOREX market, and vice versa. All around the world central banks base their monetary policy decisions mostly on the currencies' prices. This works both ways though, meaning that monetary policy decision and interest rates can also determine the price of currencies.
Central banks use this data for their benefit as an indirect mean to change and edit their country's monetary policies as they believe to be most appropriate (i.e. a stronger currency can recover a country from inflation while a weaker one will deepen the inflation).
FOREX investors who study and understand these interactions can use this information in the currency exchange market by predicting movements and trends of currencies. This is a long-term strategy - the trader must commit to this method for at least six months and up to a year, due to the fact that bottoming out of currencies may not take place. Until a year after interest rate differentials may have bottomed out, this strategy is insignificant.
Traders who use a lot of leverage will also not benefit from using the interest rate strategy, based on the fact that the differentials tend to be very small, while leverage is a tool to increase your profit especially for the short-term. FOREX brokers and companies use leverage to tempt investors turning a yield differential of 2% profit to 200% by offering up to 100 time leverage. For conclusion, although using bond spreads to forecast currency movements can be affective on the long-term, short-term investors who look for a way to make a fast-profit can not utilize it for their own needs. Using it as one of many parameters to forecast a future movement or trend though, can always contribute and be affective.
Mia Milis is an independent trader and provides financial advice regarding foreign exchange to several institutions as well as private individuals. Being an Internet enthusiast, she has taken up to provide advice through her brilliant articles, and in recent years has also founded theforexblogger.com in order to provide a platform online traders worldwide could share experiences through. Visit Mia at www.theforexblogger.com.
About the Author
Mia Milis is an independent trader and provides financial advice regarding foreign exchange to several institutions as well as private individuals. Being an Internet enthusiast, she has taken up to provide advice through her brilliant articles, and in recent years has also founded theforexblogger.com in order to provide a platform online traders worldwide could share experiences through.
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