Any trader sees that Overnight interest rates are a fundamental element of investment decisions and will drive the currency together with the stock markets in direction. FOMC rate decisions will be the second largest currency market trading moving release behind the unemployment figures. The impact of Tagesgeldkontochanges but not only have short-term consequences but have long lasting consequences on forex markets. One Central Bank's interest rate change decision can affect greater single currency pair inside the interrelated forex markets.
In fx trading, an interest differential is the difference between the base currency plus the counter currency interest rates. Inside the pair, EUR/USD, EUR could be the base currency and USD is the counter currency. The Savings Account differential for your EUR/USD pair will be the difference between the Euro interest rate plus the US Dollar interest rate. Understanding the relationship between the Overnight rate differentials plus the currency pairs can be extremely profitable for yourself as a forex investor. Along with the Central Banks overnight interest rate decisions, expected future overnight rates in addition the expected timing for that Overnight interest rates changes is often crucial to the currency pair movements.
Exactly why it is profitable is always that international investors like big banks, corporations, hedge funds and institutional investors are yield seekers. They actively keep on shifting their funds from the low yield assets to high yield assets. Savings Account differentials are considered to get the main indicators for currencies. London Inter Bank Offer Overnight rate (LIBOR) and the 10 year government bond yields usually are used as leading indicators of currency appreciation or depreciation.
Suppose the Australian government raised its Tagesgeldkontoby 25 basis points. The ten year Australian government bond yield would also appreciate to 5.50%. Now, the new yield spread is 375 basis points and only AUD. The AUD will also be likely to appreciate against USD. The normal principle is always that whenever a yield spread increases for a specific currency that currency is anticipated to comprehend against other currencies. This information must be vital on your trading. Use the interest rate data available on Bloomberg to help keep track of currencies within the pairs for you to trade.