Where can I find your swap rates? Our swap rates are visible on all our platforms, by following these simple steps: MT4 1) Click ‘View’ along the top menu 2) Select ‘Symbols’ 3) Select which currency pair you want to see the swaps for, and click ‘Properties’
What is the interest rate differential in forex trading?
The interest rate differential is the driving fundamental force behind the movements of currency pairs. The interest rate differential makes up the currency forward curve and therefore is an integral part of currency trading. Monetary policy, economic events, and political strife are the key factors that drive interest rates.
Which currency crosses offer the best interest rate differentials?
Currency crosses offer many pairs with high interest rate differentials that are prime for these types of trades. For example, take a look at the nice uptrend on AUD/JPY. If you had a long position on this pair, you would’ve made a hefty profit. On top of that, the interest rate differential between AUD and JPY was huge.
What drives the interest rate differential between countries?
There are several factors that drive the interest rate differential. Obviously, monetary policy changes are key to changes in countries interest rate levels. Since market forces drive interest rate levels, changes to economic data are also a key factor.
What is the real interest rate in forex?
The real interest rate is the nominal interest rate less inflation. Forex traders must keep an eye on each country’s central bank interest rate and more importantly, when it is expected to change, to forecast moves in currencies. This article will cover forex interest rates in depth, touching upon:
How do you calculate interest rate differential?
IRDs simply measure the difference in interest rates between two securities. If one bond yields 5% and another 3%, the IRD would be 2 percentage points—or 200 basis points (bps).
What is the interest rate differential between two countries?
Interest rate parity (IRP) is a theory according to which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate.
What is interest rate in FX?
Simply put, money attempts to follow the currency with the highest real interest rate. The real interest rate is the nominal interest rate less inflation. Forex traders must keep an eye on each country’s central bank interest rate and more importantly, when it is expected to change, to forecast moves in currencies.
How do interest rates affect the forex?
Generally, higher interest rates increase the value of a country’s currency. Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country’s currency.
Where can I find forward exchange rates?
To calculate the forward rate, multiply the spot rate by the ratio of interest rates and adjust for the time until expiration. So, the forward rate is equal to the spot rate x (1 + domestic interest rate) / (1 + foreign interest rate). As an example, assume the current U.S. dollartoeuro exchange rate is $1.1365.
What is exchange rate differential?
Exchange rate differentials refer to the income accruing to banks or government agencies holding foreign currency reserves that arises from differences between the sale and purchase prices of foreign exchange.
How do you calculate exchange rates?
If “a” is the money you have in one currency and “b” is the exchange rate, then “c” is how much money you’ll have after the exchange. So a * b = c, and a = c/b. For instance, say you want to convert Euros to US dollars. At the time of this revision, 1 Euro is worth 1.09 US dollar.
Is high interest rate good for forex?
Interest rates are crucial to day traders in the forex market because the higher the rate of return, the more interest is accrued on currency invested, and the higher the profit. Of course, the risk in this strategy is currency fluctuation, which can dramatically offset any interestbearing rewards.
How do you find the spot rate?
The spot rate is calculated by finding the discount rate that makes the present value (PV) of a zerocoupon bond equal to its price. These are based on future interest rate assumptions. So, spot rates can use different interest rates for different years until maturity.
What makes FX rates move?
Exchange rates are constantly moving, based on supply and demand. Whether one currency is in higher demand than another, depends on the perceived value of owning it, either to pay for goods and services, or as an investment.
Which currency has the highest interest rate?
Zimbabwe Keeps World’s Highest Interest Rate; Raises It to 80%
Is Forex trading just gambling?
Forex trading is considered by many to be nothing more than gambling. After all whenever you take a position in a particular currency pair, you are essentially betting on the price to either go up or down by taking a long or short position.
What is the interest rate table?
The World Interest Rates Table reflects the current interest rates of the main countries around the world, set by their respective Central Banks. Rates typically reflect the health of individual economies, as in a perfect scenario, Central Banks tend to rise rates when the economy is growing and therefore instigate inflation.
What is rate cut?
Rate cuts on the other hand, are a way to stimulate a struggling economy. The table includes actual rates, latest policy changes and the date of upcoming meetings/decisions, for the major ones.
What is interest rate differential?
An interest rate differential is a difference in the interest rate between two currencies in a pair. If one currency has an interest rate of 3% and the other has an interest rate of 1%, it has a 2% interest rate differential. The use of interest rate differentials is of particular concern in foreign exchange markets for pricing purposes.
When did the interest rate go below zero?
Starting in 2014, developed market economies took their interest rates below zero while emerging market currencies raised their interest rates. Forex traders look to make the most of the negative interest rate policy with the carry trade, but this strategy is risky for new investors.
Does carry trade earn interest?
While the carry trade does earn interest on the interest rate differential, a move in the underlying currency pair spread could easily fall (and has often done so, historically)—which could wipe out the benefits of the carry trade. “If it looks too good to be true, it probably is.”.
What is the fundamental equation that governs the relationship between interest rates and currency exchange rates?
Interest rate parity is the fundamental equation that governs the relationship between interest rates and currency exchange rates.
How many versions of interest rate parity?
There are two versions of interest rate parity:
How much did the Japanese yen depreciate in 2005?
From the beginning of 2005 to mid2007, the Japanese yen depreciated almost 21% against the U.S. dollar. 2 The Bank of Japan’s target rate over that period ranged from 0 to 0.50%; if the UIP theory had held, the yen should have appreciated against the U.S. dollar on the basis of Japan’s lower interest rates alone.
Why are forward rates important?
Forward rates can be very useful as a tool for hedging exchange risk. The caveat is that a forward contract is highly inflexible, because it is a binding contract that the buyer and seller are obligated to execute at the agreedupon rate.
How to hedge exchange risk?
Borrow an amount in a currency with a lower interest rate. Convert the borrowed amount into a currency with a higher interest rate. Invest the proceeds in an interestbearing instrument in this higherinterestrate currency. Simultaneously hedge exchange risk by buying a forward contract to convert the investment proceeds into the first …
What is the difference between forward rate and spot rate?
The difference between the forward rate and spot rate is known as swap points. In the above example, the swap points amount to 50. If this difference (forward rate minus spot rate) is positive, it is known as a forward premium; a negative difference is termed a forward discount.
When did floating exchange rates start?
In reality, however, it is a different story. Since the introduction of floating exchange rates in the early 1970s, currencies of countries with high interest rates have tended to appreciate, rather than depreciate, as the UIP equation states.
What are Interest Rates
Interest rates are the amount that is charged for a loan. The interest rates that affect the currency markets are sovereign interest rates. A sovereign rate is an interest rate from a loan that a country issues in the form of bonds to provide the capital it needs to run its country.
How Do Interest Rates Make Up the Forward Curve
When you purchase or sell a currency pair, you are buying one currency and simultaneously selling another currency. The majority of the currency transactions that take place globally are within the spot market. Spot market transactions settle within 2business days.
How does interest rate differential affect currency?
On the other hand, if the interest rate differential is moving lower, then it becomes less expensive to borrow dollars for Yen and therefore the currency pair will probably move lower.
Why use interest rate differential?
Although no specific individual methodology of determining the direction of a currency pair, using the interest rate differential is one of the best fundamental techniques as it logically helps a trader determine the costs of holding or shorting a currency.
What type of analysis is used to determine the future direction of a currency pair?
Market analysts will use specific types of analysis including evaluating capital flows or analyzing price action to create a view of the future direction of an exchange rate. Another analysis that is often contemplated in determining the future direction of a currency pair is using interest rate differentials.
What is forward rate?
The forward points in turn make up a currency forward rate. The forward points is the interest rate differential for a specific tenor, divided by the exchange rate. This amount is either added or subtracted from the exchange rate to create a rate where traders can purchase or short a currency pair at some time in the future.
Why is paying interest a strong deterrent?
This is because it costs a trader to hold on to a currency with a relatively lower interest rate. Paying away interest is a strong deterrent to owning a specific currency.
What happens when the exchange rate is higher?
A higher rate will normally draw more investment capital to a country to invest in its bonds or equities, and the increased demand caused by inflows will naturally put buying pressure on the local currency’s exchange rate. A reduction will have the opposite effect. Capital will leave, and the rate will fall.
What is a central bank discount rate?
A central bank will generally have a benchmark, or discount, rate that it charges member financial institutions for the use of overnight funds. There is also another rate that it pays for excess deposits from its members, but the focus tends to be on the former. This “Fed Funds Rate” can then influence what banks pay for deposit products …
Does a trade work when the currency appreciates?
The trade works especially well when the destination currency appreciates, adding another bit of return to the overall equation. Any change in interest rates by either central bank, however, will disrupt this equation, either positively or negatively in a big way.
Is the European region in recession?
The European region is in recession. Inflation is not a problem. The central bank had hinted at wanting to weaken the Euro and stimulate the local economy. Traders expected the ECB to lower its discount rate by 0.25%, and there was some talk about the savings rate being made negative.
Do you have to be aware of interest rates?
One must always be aware of interest rates, how they are trending, and what might influence them in the nearterm future in, not one, but both countries involved in the forex pair . In other words, a trader must always consider interest rate differentials between currencies and how markets are responding to changes in these rates.
Do traders have to be mindful of interest rates?
Traders must always be mindful of the interest rate differentials of their preferred currency pairs, data that is often posted on various forex websites. As for anticipating the future, it is advisable to follow a number of analysts and then average their expectations.
Calculating Forward Rates
Covered Interest Rate Parity

With covered interest rate parity, forward exchange rates should incorporate the difference in interest rates between two countries; otherwise, an arbitrage opportunity would exist. In other words, there is no interest rate advantage if an investor borrows in a lowinterest rate currency to invest in a currency offering a higher interest rate. Typically, the investor would take the followin…
Covered Interest Rate Arbitrage

Consider the following example to illustrate covered interest rate parity. Assume that the interest rate for borrowing funds for a oneyear period in Country A is 3% per annum, and that the oneyear deposit rate in Country B is 5%. Further, assume that the currencies of the two countries are trading at par in the spot market (i.e., Currency A = Currency B). An investor does the following: 1…
Uncovered Interest Rate Parity

Uncovered interest rate parity (UIP)states that the difference in interest rates between two countries equals the expected change in exchange rates between those two countries. Theoretically, if the interest rate differential between two countries is 3%, then the currency of the nation with the higher interest rate would be expected to depreciate 3% against the other curren…
The Interest Rate Parity Relationship Between The U.S. and Canada

Let’s look at the historical relationship between interest rates and exchange rates for the United States and Canada, the world’s largest trading partners. The Canadian dollar has been exceptionally volatile since the year 2000. After reaching a record low of US61.79 cents in January 2002, it rebounded close to 80% in the following years, reaching a modernday high of more tha…
Hedging Exchange Risk

Forward rates can be very useful as a tool for hedgingexchange risk. The caveat is that a forward contract is highly inflexible, because it is a binding contract that the buyer and seller are obligated to execute at the agreedupon rate. Understanding exchange risk is an increasingly worthwhile exercise in a world where the best investment opportunities may lie overseas. Consider a U.S. in…
The Bottom Line

Interest rate parity is fundamental knowledge for traders of foreign currencies. In order to fully understand the two kinds of interest rate parity, however, the trader must first grasp the basics of forward exchange rates and hedging strategies. Armed with this knowledge, the forex trader will then be able to use interest rate differentials to his or her advantage. The case of U.S. dollar/Can…