Interest Rate Trend Affect Forex

How does the interest rate trend affect the Forex market?

Last week the Forex market is affected by both U.S bonds auction and interest rate. Because the auction market is not vulgar, in addition with the decrease of the U.S bond rate, it will reduce the possibility of the increase of interest rate and loan, it will increase the value of the U.S dollar against other currencies. The Forex market will be affected by the retails sale, the manufacturing industry and the laborer data. According to the result announced by the Federal Reserve Department, the interest rate is to maintain unchanged which is expected by the market.

Due to the close relationship of the interest rate and the Forex market, according to the INTEREST RATE PARITY (IRP), once the country increases the interest rate, its currency value will be increased. The reason is such, if the U.S deposit interest rate rises but the Japanese interest rate is invariable (but interest rate rise certainly does not affect stock market or any investment project repayment), the Forex traders know that the saving interest in U.S is much higher than the Japan saving interest, then the fund will be able to transfer from Japan pours into US, US dollar demand will increase but Japanese Yen demand will fall, therefore, US dollar will increase in value but the Japanese Yen will be relatively soft.

The increase of interest rate will often increase the currency value but the IRP limit is such, its assumes that investor will only focused on the bank deposit and the interest rate fluctuation will not affect other investment project repayments. Let's give an example, suppose that US FED increased its interest rate suddenly, according to will uncover the interest rate inevitably to follow the rise, this will increase the cost of investment for the investors to invest in the real estate, the investment demand will drop, the demand for U.S dollar and the Forex market will drop. Deduces, the enterprise financing interest rate rise, the company cost increases, the repayment drops, invests fund of and the exchange rate the U.S dollar will fall.

It is not difficult to know that, besides IRP, there are also STOCK PARITY or any ASSET PARITY, as long as any situation causes the repayment to be higher, the attraction capital inflow will be the possibility of increasing value. But as we mentioned before, the increase of interest can increase the deposit fund inflow, and it will also decrease the repayment from the stock market, in the reality, the increase of interest rate can cause the currency to appreciate or to depreciate? Actually the above situation could occur in the market, but generally, increase of interest rate and the increase of the currency could occur at the same time.

When the central bank has the condition to the interest rate, it is usually when the economy continues to grow, the investor anticipated the economy to be good and to increase and inflow fund, causes the currency to increase in value; On the opposite, reduce interest rate to stimulate the economy will actually let the investor knows that the economical situation is bad, if reduces the interest could not reverse the economy, it will frighten the investor and will bring about the depreciation.

This show how does the anticipation will affect the market, for example the investor anticipated the USA Congress to increase interest rate, US dollar will be able to revalue and continues to digest the anticipated interest rate news, when American has increased the interest rate just as anticipated, because the Forex market has digested such news. It will not affect the market anymore, this will be so-called "BUY ON THE RUMOR AND SELL ON THE FACTS", but if the result and the reality is not match, the Forex market will have a big fluctuation.

Even though the data is good but it will not necessarily increase the value of the currency, Forex traders will often use the data announced by the government as a trading reference. Generally, most of the Forex trader will think that the economy is good if the data is positive, but actually this is only a misunderstanding, because the data all will be the passing statistics, if in July retail the turnover large has rise, then in July the demand for U.S dollar will increase, the value for the currency will increase, therefore when the July data has been announced in August, the currency value will not increase, this is because the large rise that happened before has affected the anticipation of the traders towards the future. The Forex trader will believe that this is a long-term trend, therefore, the increase of the currency value is due to future anticipation.

After understanding this, let's hope that everyone would know how to analyze through fundamental analysis.

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