Forex interest rates

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Since traders are aware of the importance of interest rates in determining forex trends, it should be obvious that understanding the yield curve, and what it signifies can be very useful in trading decisions. We'll handle each interest rate theory in detail in its own article, but before going further, let's examine them in an overview in order to stay in touch with the big picture.

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Covered Interest Rate Arbitrage
Consider the following example to illustrate covered interest rate parity. Assume that the interest rate for borrowing funds for a one-year period in Country A is 8% per annum, and that the one-year deposit rate in Country B is 5%. Further, assume that the currencies of the two countries are trading at par in the spot market (., Currency A = Currency B).

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Looking at long-term cycles, the Canadian dollar depreciated against the . dollar from 6985 to 6985. It appreciated against the . dollar from 6986 to 6996 and commenced a lengthy slide in 6997, culminating in its January 7557 record low. From that low, it then appreciated steadily against the . dollar for the next five and a half years.

Since currency trends are strongly dependent on perceptions about future rates, as well as present yield differentials between nations, comparing the yield curves of two nations will give us a better idea on the attractiveness of a particular currency for a particular profile of investors. Many hedge funds, for example, are active in the short-end of the yield curve, and also trade the spot forex market, so their behavior will tend to reflect differentials in the short-term market. Others, such as mutual funds, tend to seek safety over risk in usual circumstances, and their unleveraged funds will tend to be concentrated a bit further to the right of the yield curve (towards longer maturities).

That isn't to say that interest rates are too confusing for the average day trader just that they should be viewed with a wary eye, like any of the regular news releases. (Read Trading On News Releases to learn more.)

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    Major Announcements
    Major announcements from central bank heads tend to play a vital role in interest rate moves, but are often overlooked in response to economic indicators. That doesn't mean they are to be ignored. Any time a board of directors from any of the eight central banks is scheduled to talk publicly, it will usually give an insight into how the bank views inflation.

    In mathematical terms, LPT differs in its calculation of the yield curve only with respect to an additional risk premium (rp) component added to the expected rate of the pure expectations theory. Read more about the liquidity preference theory

    For example, on July 66, 7558, Federal Reserve Chairman Ben Bernanke gave his semiannual monetary policy testimony before the House Committee. At a normal session, Bernanke reads a prepared statement about the . dollar's value, as well as answers questions from committee members. At this session, he did the same. (Read more about the head of the Fed in Ben Bernanke: Background And Philosophy .)

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