www.informedtrades.com/25497-how-interest-rates-move-forex-market-part-2-a.html

In our last lesson we continued our free forex trading course with a look at interest rates and how the capital flows associated with movements in the interest rates of a country affect the value of its currency. Now that we have a basic understanding of how interest rates move the forex market, lets help drive this point home with a specific example from today's market environment.

For our example we are going to say that I am a savvy investor located in the United States who is seeking a good place to park some savings where I can earn a decent return on my money. For this particular slice of my portfolio I am looking for an interest paying instrument that will pay me a steady stream of cash on my money.

As many of you already know a government or corporate bond will do just this paying me whatever the interest rate is as set by the country's central bank that I am investing in, plus an additional interest rate depending on the length of the bond that I am investing in (for example a 1 year bond is generally going to pay me a lower rate of interest than a 10 year bond) and for the extra risk that I take on for different type of bonds (for example a government bond is normally going to pay me less than a corporate bond because there is less chance that the government is going to default on the loan).

So, knowing this, I decide that I would like to invest in a bond that pays me a good rate of interest, and I am not looking to get too speculative about this investment, so I prefer a government bond over a corporate bond. For our example we are going to say for simplicity's sake, that the bonds of the countries that we have available to invest in pay an interest rate equal to the interest rate in the country as set by the central bank.

Now with this in mind the next thing that I do is list out all the different interest rates for the major countries of the world and I come up with:

[B]United States: 2.00%
Euro Zone: 4.00%
Japan: .50%
United Kingdom: 5.00%
Australia: 7.25%
Canada: 3.00%
New Zealand: 8.25%
Switzerland: 2.75%[/B]

After reviewing my options its seems pretty clear that if I am just going on interest rates, then New Zealand is the place to put my money as this will earn me an extra 6.25% in interest each year over investing that same money in the United States. Now I am not going to drag the lesson out by including all the history of the interest rates in New Zealand here, but I will tell you they have been in a high interest rate environment relative to the United States for quite some time. With this in mind if I would have have followed this logic in the past then it would have played out very well for me not only from an interest rate standpoint but also from a currency appreciation standpoint.

Now obviously hindsight is 20/20 and I have simplified things here for our understanding, but this is not too far off from how international investors including large market moving hedge funds and other players think. It is also a great example of the forces we have spoken about in our lessons on capital flows and in our last lesson on interest rates at play in today's market.

1. An Overview of the Forex Market
2. The Difference Between Over the Counter (OTC) and Exchange-Based Markets
3. Who Really Controls the Forex Market?
4. The Role of the Retail Forex Broker
5. How Central Banks Move the Forex Market
6. How Banks, Hedge Funds, and Corporations Move Currencies
7. A Breakdown of the Forex Trading Day
8. Forex Trading - Characteristics of the Main Currencies
9. Setting Up Your Forex Trading Software
10. Forex Trading - How to Read a Currency Quote
11. Forex Trading - Understanding Currency Rate Movements
12. Forex Trading - Understanding the Bid/Ask Spread
13. How to Place Your First Forex Trade
14. How to Determine Your Position Size in the Forex Market
15. Forex Trading - Pips and Fractional Pip Pricing
16. How to Calculate Forex Trading Profits and Losses
17. An Introduction to Leverage in Trading
18. How Trading on Margin Works
19. How to Calculate Leverage in the Forex Market
20. How to Calculate Leverage in the Forex Market Part 2
21. How to Place a Market Order in the Forex Market
22. How to Place a Stop Loss and Take Profit Order in Forex
23. How to Place A Pending Entry Order in the Forex Market
24. How Rollover Works in Forex Trading
25. How Rollover Works in Forex Trading Part 2
26. Free Forex Charts Userguide
27. What Moves the Forex Market? - Trade Flows
28. How Capital Flows Move the Forex Market
29. The Current Account: How Forex Traders Can Use it to Identify Opportunities
30. Interpreting the Capital Account and Measuring Capital Flows
31. Fundamentals that Move Currencies - Balance of Payments
32. How Interest Rates Move the Forex Market Part 1
33. How Interest Rates Move the Forex Market Part 2
34. How To Trade the Carry Trade Strategy Part 1
35. How To Trade the Carry Trade Strategy Part 2
36. How To Trade the Carry Trade Strategy Part 3
37. Fundamental Analysis Vs. Technical Analysis in Forex
38. Forex Trading Fundamentals Quiz - Test Your Knowledge
39. Why the US Dollar is Still King
40. Determining the Fate of the US Dollar
41. Determining the Fate of the US Dollar Part II
42. Determining the Fate of the US Dollar, Part III
43. Economic Releases that Move the US Dollar
44. A Trader's Introduction to the Euro
45. A Trader's Introduction to the Euro, Part II
46. A Trader's Introduction to the Euro, Part III
47. A Trader's Introduction to the Yen
48. A Trader's Introduction to the Yen, Part II
49. A Trader's Introduction to the Japanese Yen, Part III
50. A Trader's Introduction to the British Pound
51. A Trader's Introduction to the Swiss Franc
52. A Trader's Introduction to the Canadian Dollar
53. A Trader's Introduction to the Australian Dollar
54. A Trader's Introduction to the New Zealand Dollar
55. Why Choosing a Forex Broker is so Confusing
56. Choosing a Forex Broker: Regulation and Financial Stability
57. Choosing a Forex Broker Part III: Transaction Costs
58. Choosing a Forex Broker, Part IV: Technology & Add-ons
59. Choosing a Forex Broker: Evaluating Customer Service
60. An Introduction to Forex Capital Markets (FXCM)
61. An Introduction to DailyFX Plus

This 61-video series is an introduction and in-depth look at the forex market, including how to place trades, the fundamentals of the forex market, profiles of the main currency pairs, and factors to consider when choosing a forex broker.



This is a continuation of The Basics of Trading course by Informed Trades.