Foreign Currency Trading Software can be a great way to make extra money. But have you ever been sitting there trading away and suddenly the currency goes in the other direction. In the news you hear that the country of the currency you were trading has just increased or decreased their interest rate, but you don’t necessarily connect the two. However, interest rates can have a dramatic effect on the exchange rates, and therefore can be a big influence on your foreign currency trading software profitability. In a continuation of Forex Trading Systems 4 You’s how to trade forex series, today we explore why interest rates matter.
One of the countries most dramatically impacted by the interest rate vs exchange rate game is my home country of New Zealand, so we will use that as my example today. The NZD and USD is one currency pair that can have huge currency variations – 1 USD can be worth anything from 1.25 to 2 NZD … yes, that is a huge variation and a great opportunity to make money.
So why does this occur? The answer is that New Zealand has of late had some of the highest interest rates in the world. It was possible to earn over 8% in just a bank savings account, vs banks in other countries offering you maybe 3 – 4% if you were lucky. Therefore investors with mobile money would invest money in New Zealand in order to gain the higher interest rates and earn more money – in particular the Americans and Japanese. The increased demand for the New Zealand dollars then pushes the exchange rate up as there is only a finite supply of NZD to be brought.
The higher exchange rate for NZD has the effect of making imported goods cheaper for New Zealanders. As consumers spend more the Reserve Bank increases interest rates to try and fight off inflation, thereby increasing the flow of investors wanting to buy NZD, and so the cycle continues.
Eventually the high interest rates will have their intended consequence, the New Zealand economy will slow down. At this point the Reserve Bank starts to decrease interest rates to keep the economy turning over. At this point foreign investors generally decide to take their profits, cashing in a large amount of NZD in a hurry. This pushes the exchange rate down in quite a hurry.
At this point, New Zealand exporters are happy because their goods are now becoming cheaper to sell on the world market. Over time sales increase, and this kick-starts the economy again. Pretty soon the Reserve Bank is increasing interest rates again, and the whole cycle repeats.
Most “free market” economies in the world are impacted by the change in interest rates – New Zealand is simply one where the impact is so easily illustrated. But the same is true of all economies. Generally the central bank of each country makes a decision on interest rates every 4 – 6 weeks. However in extreme situations unscheduled announcements may be made as has happened recently during the economic crisis.
If you are using foreign currency trading software to make money on the markets then it is very important you have your own market intelligence. For any currency that you trade in, always be aware of when the interest rate announcements are made as the reaction to these announcements is often very swift. Also be aware of what market analysts are predicting – do they think it will go up or down – and then trade accordingly.
Whether you’re a beginner or an experienced user of Foreign Currency Trading Software having some sort of market intelligence is very important. Forex Brotherhood leads the way in this respect giving you twice daily live video updates that keep you informed of what is happening in the world’s markets that tell you what you need to be aware of – and much more!. Read more about Forex Brotherhood here.
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[...] As you’ll remember from one of my previous articles, we discussed how interest rates can impact your forex trading. [...]