Which factors determine foreign exchange rates in the medium run (year to year) and what strategies do foreign exchange traders use to leverage that? Here are some terms to consider, make sure to check IQoptions to keep on reading more about trading strategies.
- Real Interest-Rate Differential: In order to understand this trading strategy, one has to understand what real interest rates and interest rate differential are. Real interest rate is the interest rate of an asset after inflation adjustment. The real interest rate differential is the interest rate gap between two assets. When using a decentralized crypto trading platform, interest rates are primarily determined by the Interbank Offered Rate, which is the average of interest rates estimated by leading banks in the area. In theory, the rise in the real exchange rate in response to the change in real interest yield spreads (this is the difference in a currency’s returns) should be instantaneous. As a result, when a currency’s interest rate changes in value, the subsequent exchange rate should change as well. This is followed by a gradual decline in the real exchange rate back to its long-run equilibrium value as real yield spreads return to their normal levels. In practice, both the change in real yield and exchange rate tend to be much more gradual. To make a profit, a foreign exchange trader can exploit the gradual exchanges in foreign exchange and yield spreads. Our intensive 8-week Career Training Programme offers a unique, cutting edge training carried out in an immersive learning environment not found or developed elsewhere. Checkout how to trade Forex. Some products advertise being a “set it and forget it” solution but that will not work with FOREX or stock trading. It is your money invested in the system and with the system so if it does not function properly you lose money. One of the more established programs for this is trusted signals, also referred to as 1000pip Builder.
- Forward Rate Bias: The forward rate is a currency’s exchange rate at a future date. This exchange rate is predicted by speculators and investors can “lock” onto a forward rate to ensure that their exchange rate is the same. However, the forward exchange rate does not accurately predict the future exchange rate. Economists have done extensive research and have concluded that the forward exchange rates tend to be lower than the future spot exchange rates. (This is the present exchange rate). The term “forward rate bias” comes from this trend that the predicted future rate is lower than the actual rate. As a result, currencies trading at a forward discount tend to outperform those currencies trading at a forward premium. Therefore, an investor could go long the higher yielding-currencies in anticipation that they will outperform their respective future contracts, and go short the lower yielding-currencies in anticipation that they won’t outperform their respective future contracts.
- Monetary Policy: Monetary policy is whenever a country’s central bank increases or decreases its money supply. For example, a country’s central bank raises its interest rates—or performs quantitative easing. Generally, expansionary monetary policy affects the country’s interest rate. As there are higher interest rates, there is more demand for a particular currency. Thus, the money supply increases and the currency’s exchange rate rise. Foreign exchange traders can pay attention to the actions done by a country’s central bank in order to determine market sentiment as well as figure out the psychology of traders and how they would respond to the market.