Interest Rate Decisions
Central banks around the world hold the key to the economic prosperity of their countries. This key is their control over their interest rates. Interest rates determine the perceived value of the local currency as against others. Interest rates have a direct relationship with their currency’s value; when one goes up, the other generally will go up too, though not always. This value is critical for the country’s success in the international markets in order to maintain a healthy balance of trade.
Central banks have the unenviable task of fixing an ideal rate that will not negatively impact the economy. They need to consider factors such as local inflation the StraddleTrader Pro and business environment. They need to maintain an interest rate that is not inflationary and will keep the engines of commerce humming smoothly.
If they have to raise rates, say to curb inflation and slow their over-heated economy, it results in their currency value going up against other currencies in the world. This results in the local exports becoming more expensive and will negatively affect those industries.
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If the reason for the rate hike is due to a strongly rising economy in that country then the impact on the exchange rates will be more firm and long lasting. Over the last year, such a scenario was witnessed in Australia. This country had a very shallow recession and rebounded rapidly thanks to its commodity based economy whose exports were much in demand in emerging countries. The central bank in Australia raised interest rates as economic conditions improved and buyers rushed into this currency.
If you can successfully predict which way interest rates are headed, you will make the right calls on the related currency trades.