*1-y Loan Prime Rate
Why is it Important to Monitor the Current Interest Rate and the Projected Interest rate?
When a country’s Central Bank raises its interest rates, it makes its assets more attractive to foreign investors due to the potential for higher returns. As a result, there is an increased demand for the country’s currency, leading to an exchange rate appreciation. Conversely, when a country’s central bank lowers its interest rates, it makes its assets less attractive to foreign investors, leading to a decrease in demand for the country’s currency and a depreciation of the exchange rate.
Changes in interest rates can also affect capital flows. Higher interest rates attract foreign capital, increasing demand for the country’s currency and an appreciation of the exchange rate. Lower interest rates may lead to capital outflows as investors seek higher returns elsewhere, which can lead to a depreciation of the national currency.
The expectation of future interest rate changes has a very strong impact on a country’s currency, and often even stronger than the current one. If investors expect interest rates to rise in the future, they will buy the country’s currency now, which will cause the exchange rate to appreciate.
How Can this Information Help Investors and Traders?
Example. If the Bank of Japan (BoJ) is going to raise interest rates next year while most central banks are cutting them, this increases the likelihood that the Japanese yen will appreciate against other currencies over the course of the year.
Another example. If the central bank of Australia (RBA) is planning a 0.25% rate cut next year while the US Federal Reserve (Fed) is projecting a 1.00% rate cut, then the US Fed will ease policy much more than the RBA, so there is a high probability that the Australian dollar will rise against the US dollar next year.
Yes, this information won’t help intraday traders much, but it will give insight into what kind of market bias to expect in the medium to long term.
