Interest rate differentials now rising to the top!

In 2007 the world changed, and for traders changed beyond recognition. Prior to these cataclysmic events most financial markets operated on one where price discovery was the norm, and most currencies could be considered to be free floating. All of that changed as the financial crisis engulfed the world, and with this tectonic shift, so the trading world changed too. No longer were exchange rates left to free float, but all became tightly managed, either through quantitative easing, or through the overt manipulation of currencies to protect fragile export markets, sparking the ‘race to the bottom’.

GBP/USD monthly chart
GBP/USD monthly chart

During this period interest rate decisions from central banks have come and gone, and in general been treated with little or no interest. And in most cases dismissed as non events with only marginal interest in any associated statement. As a result these announcements have fallen well down the list of ‘red letter’ fundamental new releases. However, as the world begins to emerge from the wreckage of the financial crisis, these key drivers of the foreign exchange markets are now beginning to take centre stage once again, and for evidence of this we need look no further than the British Pound, and to other currencies such as the Aussie dollar and the New Zealand dollar. Whilst the ‘sick man of Europe’ remains in intensive care and the US economy continues to stagnate, others are beginning to emerge with consequent strength in their currencies.

NZD/USD monthly chart
NZD/USD monthly chart

In the UK BOE Chairman Mark Carney has already signaled an interest rate rise coming sooner rather than later, which has seen Sterling move to test 1.70 against the US dollar. Last week’s interest rate rise in New Zealand followed a similar pattern with the NZDUSD rising strongly along with the NZDJPY, the latter being the traditional carry trade pair of choice. In the global search for yield the focus on interest rate differentials is now going to become increasingly significant for traders (and investors), and perhaps the question that will need to be answered is which currency is likely to be the funding currency of choice. And here there is an argument to suggest that the euro could compete with the yen, along with the US dollar.

NZDJPY_monthly_001The technical view reinforces this shift with cable moving firmly higher and looking to breakout beyond the 1.7096 price point on the back of an extremely well developed platform of support which has been building over the past five years.  The same is also true of the NZDUSD where any move beyond the 0.8860 area will have a similar bullish trend develop. Finally, the NZDJPY is at a key area at the 0.9030 price region where any move through here will see further bullish momentum for the pair.

By Anna Coulling

About Anna 1036 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

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