| Real Interest Rates Turn Negative in the U.S. |
| Written by John Jagerson Forex Fundamental Analysis | ||||||
Fundamental analysis in the forex is often summarized by comparing interest rates and trade from one economy to the next. This is not necessarily a bad idea but it does leave some room to improve. For example, traders typically look at "interest rates" as equivalent to the rates set by the relevant central banks as their overnight lending rates or "cash" rates. That is definitely not the most important rate but it is usually the most visible in the media. The reason the rate set by the central bank is not the most important rate for you to consider is that investors, including retail traders, hedge funds, institutional investors, etc are not borrowing or lending at that rate. The fed funds target rate in the U.S. for example, does not directly impact a retail investors. This doesn't mean that it doesn't have some indirect effects but it really only directly impacts the overnight reserve and lending requirements of banks. The real interest rate is the rate you should be paying attention to. The real interest rate is a simple concept and it doesn't have very much to do with the Fed funds rate. We determine the real interest rate by using an important market yield available to investors directly and make it "real" by accounting for the erosion of value or inflation. The benchmark rates that we feel are most important for this kind of analysis at Learning Markets are the 10 year government note yields. Equivalent yields and notes are available from just about all the major economies that we trade as currency investors. Using the 10 year note yield (which is considered risk free) simplifies our analysis considerably and it reveals things about the relevant yields available from one economy to the next that is not apparent from the benchmark central bank rates. The table below compares the central bank overnight target rates of three sample economies. The differential is marked between the USD (1%) and the AUD (6%) and based on that information many traders are confused why USD strength is such an issue right now. Why wouldn't the AUD be more attractive than it has been over the last few months? The answer can be see once you derive the "real interest rate" by subtracting annualized inflation rates (CPI) from the 10 year yield.  - We include inflation, central bank rates and the 10 year yield in the forex fundamental seesaws available everyday in the forex section of the Learning Markets website.  In the video I will go into more detail about the real interest rate and how to find it yourself for your forex analysis.- Charting provided by Metastock Pro FX. For a free trial, click here.
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
