Page 90 - Ultimate Guide to Currency Trading

Interest Rate Changes

It is true that the news moves the currency markets. It is also true that there are two types of news,
fast-happening news and slow-happening news. An announcement of an interest rate change can be
the source of the most sudden of currency pair movements. If you are invested in a currency pair and
one of the ends of the trade is changing its interest rate, you can rest assured that there will be a wild
ride coming soon.

Use Interest Rate Announcements and Your Spare Margin

Central banks give the markets ample time to get ready for an interest rate announcement. All it takes
from you is to look at the websites of the central banks that are related to the trades you are in at the
time. If you think the stock market will be going down and you are in a long EUR/SEK trade, and the
Riksbank lists on their website that they will be making an announcement regarding any change on
their repo rate at the end of the week, then you should be wary of this and scale back any trades. At
the very least, you should have enough unused margin to absorb any downturn in the market if the
Swedish bank raises its repo rate: If it does raise it by any amount, this will throw off the prices of that
currency pair and your profit to boot. A second method that you can use to help prevent a totally
disappointing trade is to have enough spare margin to buy into the currency pair at the new price if it
moves against you. In this way you can lower the average cost of your FX pair to include the new price.
This staged building of the position can go a long way in keeping the trade at a point that money can
still be made off it once the stock markets do fall, and the SEK goes with it.

Monitor Interest Rate Changes

Interest rate changes are very big in the Forex trading world. This is true because one of the elements
of determining the fair price of a currency pair is predicting the growth rates of countries. If a country
looks as though its growth rate is more than that of another country, there is chance that the home
country will raise the level of its interest rates in an effort to control the economy. The opposite is also
true. If there is an expectation that a country's economy is slowing, then there is a good chance that
the home country's central bank will either lower interest rates or take other measures to make
money easier to borrow. By allowing money to be easier to borrow, the central bankers are hoping
that the function of borrowing and spending will spur the economy and help move it forward.

It is said that, after the quantitative easing that followed the 2008 banking crisis, there
was more than four times the amount of money brought into the system than the years
previously. This brought about concerns of widespread inflation and caused ramped up
speculation in the commodities markets.