How to profit from exchange rate policy

How to make money using economic indicators?

It is an analysis method to predict the exchange rate fluctuations in the future by analyzing the “fundamental parts of the economy” such as interest rates policy or employment statistics announcement.

Financial experts and think-tanks first make predictions about the expected numerical values of economic indicators, then information vendors such as Reuters gather forecast information, and finally consensus is reached to form early market expectations.

Also, it is important how the actual numerical values were announced (whether they really are as expected, or there is a gap between the actual and expected values) because the results could be a contributing factor to a great fluctuation in the market (market price) after announcement.

On the other hand, within several minutes after the economic indicators announcement, the probability that forex changes in one direction is very high; therefore it is possible to make money using this movement in binary option or FX trading.

How to profit from the announcement of policy interest rate!

Policy rate is the interest rate at which the central bank loans to other banks (commercial banks).

Determined by the monetary policy of the Central Bank, policty rate is set high when the economy is good and low when the economy is bad.

As a result, interest rate of loans and deposits increases when the economy is good, the circulation of money is limited; interest rate decreases when the economy is bad, giving implication for promoting the circulation of currency.

Generally, a rise in interest rates becomes a contributing factor to the currency appreciation as interest rate differential expands; conversely, a decline in interest rates becomes a contributing factor to the currency depreciation as interest rate differenetial narrows.

In addition, even in the case of stationary interest rate policy, exchange rates could still rise if there is a positive growth in economic conditions; however, there might be a case that exchange rates decline if market participants determine that the stationary interest rates policy is inappropriate.

2013 policy interest rate

  • Policy interest rates are set high when the economy is good, and are set low when the economy is bad
  • A rise in interest rates leads to currency appreciation
  • A fall in interest rates leads to currency depreciation