Salam.
1. Kelas Pelaburan Emas dan Analisis Teknikal akan di adakan pada 17 Disember 2011 di Cititel Midvalley, KL. Yuran RM300.
2. Kelas Forex Patterns and Strategies akan di adakan pada 22 Disember 2011 di Anjung Technology, Ayer Keroh, Melaka. Yuran RM500.
Hubungi saya untuk pendaftaran. Tq.
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Good day traders!
Not much of a trading today because its Thanks Giving Day in the US. For that reason, I want to share something important but often neglected by some traders. It is called interest rate.
A quick quiz would do the trick here, do you know what is the interest rate of your country? Say… Malaysia? How about China? India? I bet we know the US and Euro interest rate because these country (zone) are always on the header. Attached is a the interest table that you might find useful:
| Central Bank |
Interest rate |
| Fed Reserve |
0.25% |
| Bank of England |
1.25% |
| Bank of Japan |
0.1% |
| Bank of China |
6.56% |
For a full list of the interest rate, you can read here.
So, why do traders listen to interest rate? Now, generally speaking, when all other variables are kept equal, rising interest rate (central bank tightening) have a tendency to contribute to an appreciation in a currency. This is because higher-yielding currencies attract more demand from large institutional investors, who are consistently in search of ways to earn more on their money.
By the way, yield means the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. (Read more: http://www.investopedia.com/terms/y/yield.asp#ixzz1echyfV6c).
If on the other hand, there is a lowering of interest rates (central bank easing), the tendency is towards a depreciation of the currency. This is due to decreasing demand by the institutional investors, who generally tend to move their money away from lower yielding assets.
Kept in mind that from a foreign exchange trading perspective, the appreciation or depreciation in the exchange rate is less a product of the absolute value of the interest rate than the direction of change in the interest rate itself. In other words, although the current interest rate for a country’s currency is important in helping the market to determine its exchange value, the direction of interest rate change is even more important.
Lets face it, just because a currency carries a high yield, it does not ensure an appreciation in the exchange rate. But if the currency’s central bank continue to raise interest rate, and indicates an intention to keep doing so, this can have a considerable impact on appreciation in the currency. And it goes vice versa.
As you already know, central banks are the one who initiate the interest rate changes. These institutions also make decisions that help determine the direction on the interest rate. In adjusting the interest rate, central banks seek to achieve a delicate balance between attaining a significant level of economic growth while staving off excessive inflation.
A certain controlled level of inflation is necessary for economic growth, as a country without inflation is a sign of a stagnant economy. At the same time however, excessive inflation can be enormously disadvantageous to an economy and its consumer. Therefore, each central bank must take both goals of economic growth and inflation control into serious consideration when setting monetary policy.
Generally speaking, central banks will look to increase interest rate (tighten) in order to help stave off excessive inflation. Conversely, central banks will look to decrease interest rates (ease) in order to help stimulate economic growth. Either way, central banks have the power to impact the foreign exchange markets enormously by making changes in interest rate policy.
Often, an actual change in rate policy is not even needed to affect a currency’s value. Merely a comment hinting at potential policy intention within a speech by the Fed chairman, for example, is often sufficient to trigger drastic price moves. This highlights the fact that it is not as much the actual fundamental that move currency exchange rates. Rather, it is more the trader’s collective perceptions and expectations of the fundamentals that truly drive these markets.
With the understanding of the interest rates, traders created a new breed of trading called carry trade, which I’ll share with you later.
Happy piping!
Shufaad
+60166447174
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Trading Philosophy
“The dictionary is the only place that success comes before work. Hard work is the price we must pay for success. I think you can accomplish anything if you’re willing to pay the price”
- Vince Lombardi, Pro Football Hall of Fame
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