So as you can see, global interest rates set by central banking policy have a major impact in the currency markets. High interest rates attract investment and increase the demand for the local currency and drive up its value. Interest rates are very slow to change, so they often create long-lasting trends.
We’ve also learned in Chapter 3 that some economies, specifically those that export a lot of goods and services to foreign economies, actually want their local currency to be as cheap as possible. This stimulates their exports and is good for their economies.
Currency trading, boiled down to its essence, is trading appreciating currencies vs. depreciating currencies. As we’ve just discussed, these value changes are often orchestrated by central banking policy. As they slowly adjust interest rates, they create long-term trends. So, when creating a trade plan, it’s often good to look at the interest rates of the currencies you are trading.
Trading a currency from an economy that is in a trend of raising interest rates vs. a currency from an economy that is in a trend of lowering interest rates is at the heart of what we do: strong vs. weak. However, did you know that you actually earn the interest as a forex trader? Many new traders do not know this. If you buy the NZD/JPY, you will earn the interest that New Zealand will pay you for your deposit, minus interest you must pay the Japanese for the money you borrowed from them.
New traders are so focused on pips, they ...