Any trader is aware that Overnight interest rates are an inclusive element of investment decisions and can drive the currency and also the stock markets either in direction. FOMC rate decisions are definitely the second largest currency market moving release behind the unemployment figures. The impact of Zinsen Tagesgeldchanges not just have short term consequences but also have long run consequences on forex markets. One Central Bank's interest rate change decision make a difference to more than a single currency pair from the interrelated forex markets.
In forex trading, an interest differential may be the difference between the base currency and the counter currency interest rates. Inside pair, EUR/USD, EUR will be the base currency and USD is the counter currency. The Savings Account differential with the EUR/USD pair will be the difference between the Euro interest rate and the US Dollar interest rate. Must relationship between your Overnight rate differentials plus the currency pairs can be very profitable in your case as a fx trader. In addition to the Central Banks overnight interest rate decisions, expected future overnight rates as well the expected timing for the Overnight interest rates changes is usually imperative to the currency pair movements.
Exactly why it is profitable is the fact international investors like big banks, corporations, hedge funds and institutional investors are yield seekers. They actively go on shifting their funds in the low yield assets to high yield assets. Savings Account differentials are believed to be being the main indicators for currencies. London Inter Bank Offer Overnight rate (LIBOR) as well as the 120 month government bond yields are usually used as leading indicators of currency appreciation or depreciation.
Imagine that the Australian government raised its Overnight rate by 25 basis points. The 10 year Australian government bond yield would also appreciate in order to 5.50%. Now, the new yield spread is 375 basis points simply AUD. The AUD are likewise most likely to appreciate against USD. The general guideline is that often whenever a yield spread increases in favor of some currency that currency is expected to appreciate against other currencies. This info must be essential on your trading. Use the Zinsen Tagesgeld data located on Bloomberg to maintain on top of currencies in the pairs which you trade.