Today
and tomorrow I am conducting a 2 Day LTG GoldRock Private Masterclass with 10 Traders here
in Melbourne and we have this morning been discussing the long term interest
rate trends of Central Banks and how they affect currency values. I don't
believe you should fight against Central Bank trends. Let me give you a broad
example below.
- Australian Dollar.
The RBA has been lowering interest rates as the economy has been weakening and
finally the AUD fell from its highs once the spot light showed Australia had a
generally weakening economy and interest rates were predicted to go lower. But
what has been more forceful in directing the Aussie Dollar lower and higher at
times has been interest rate predictions and stimulus predictions of the US
Federal Reserve. One thing is clear the Australian Dollar is moving steadily
lower as trader’s price in potentially higher interest rates in the USA in
2014.
- British Pound.
The Bank of England has said many times that it will likely put interest rates
up once unemployment reaches 7% or below. So every time the UK gets a positive
economic data announcement that points towards potential job creation, up goes
the Pound as trader’s price in potentially higher interest rates long term.
- US Dollar. The
US Fed has interest rates at 0% and also has a stimulus program of $85 Billion
a month it is injecting into the economy. This money printing has devalued the
USD over the past few years but as the US economy appears to have now turned
the corner and is steadily improving jobs are also being created. The US Fed
has said it will likely slow the stimulus or raise interest rates once
unemployment reaches 6.5% and growth improves. However what the market is
fascinated with is when the US Fed will stop or slow printing money because
when they do the US Dollar and interest rates are likely to rise in value.
It can
be extremely helpful as a trader to understand what interest rates are likely
to do to a major currency over the coming 6 - 12 months. In the case of the US
Dollar, interest rates there are likely to go up and in the case of the Aussie
Dollar interest rates and the economy is now pointing lower.
So how
can you take advantage of this? One strategy which I would hold no objections
to is trading a currency that has the likelihood of the interest rate in that
country rising and trading it against a country that has the likelihood of
interest rates and the economy is falling. An example of this right now would
be short AUDUSD and short AUDNZD. The base currency is the Aussie Dollar in
both examples and the cross currency the USD and the NZD. The AUD has the
potential of lower interest rates and a weakening economy and the US has the
potential of higher interest rates and an improving economy and so does New
Zealand.
The
most influencing factor in a currency value is what the collective market
thinks about where interest rates will be for that currency in the next 6
months.
