Interest Rates and FX Trading

Carry Trade in FX Trading

One of the drivers of the forex market is the interest rates of a country.  There are actually two ways that you can use the interest rates when you look at FX trading.  It is important that you consider what these ways are so that you can determine whether or not you should be making use of them.  There are some traders who do make use of both interest rates methods and there are others who use neither.

The Ways Interest Rates Affect FX Trading

There are two ways that interest rates affect FX trading.  The first way is through the movement of the currency pair.  The interest rate of a country is one of the major economic drivers of the foreign exchange rate.  It is also one of the drivers of the stability of the economy and the way that traders and investors view the country.

The second way that the interest rates affect FX trading is through the carry trade.  The carry trade is a special strategy that traders look at to make a passive income on the market.  The carry trade is directly linked to the different interest rates in the different countries.

Using the Interest Rates Price Movement

The price movement that comes from the interest rates will be a major movement on the market.  This does not mean that it is going to cause a major change in the price, but it will have a high impact on the market.  The interest rates are not often changed and when they are there will be a reaction on the market.  The reaction that you see will depend on a number of factors that you have to be aware of.

The first factor you need to know about is the market sentiment toward to the interest rates.  If the interest rates move in a way that the market was expecting then there is going to be very little change.  However, if the rates change in an unexpected way then the movement will be more pronounced.

The second factor that you have to consider is the other news that lead up to the interest rates.  This will actually affect the market sentiment that is related to the rates.  If the other news releases have downplayed the impact of the interest rate changes then there could be a smaller movement on the market.

Using the Carry Trade

If you want to make a passive income on the forex market then you should consider the carry trade.  With this trade you are going to have a currency pair with one currency that has a high interest rate and one currency that has a low interest rate.  The bigger the difference between the two rates the more you are going to be making.  To successfully complete a carry trade you need to be buying the high interest rate currency.  This means that you are going to be holding this currency when the rollover time comes.

The broker that you work with will have a cut off time for the end of day trading.  You need to have your carry trade open at this time otherwise you will not make a profit.  The broker will then calculate the rollover credit or debit you have made and pay this to you.

 

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