INTEREST RATES

Interest rate is probably the most important when it comes to determine the strenght of a currency and the valuation.

And who is in charge of controlling the interest rates?

Well… It is countries central bank. They are charge of the interest rates.

So let’s talk about what will cause a change in interest rates.

First and foremost is the inflation, inflation is affected by econimic growth, that is whay one doller 100 ago could have gotten you 5 packets of milk, but today are dollar might give you 10 minuyes in a parking lot.

Too much inflation can harm a countries economy and that is why the central bank play a crucial role in controlling it.

So what are important news to keep a watch that causes fluctuation in our inflation? wwll it is the CPI and PCE.

So id a central bank want to control the inflation of a country, they will have to increase the interest rates, this will in turn lead to a lower overall growth of a country and in turn lead to a slower inflation.

High interest rates will lead to consumers and businesses to borrow less money and instead choose to save more, this in turn leads to less overall spending and the economy will slow down.

For example, if the interest rate is low, you will take out lons because you will get it for a low interest rate. Meaning you will take more risk and try to develop yor business more and more, leading to you buying more services from others, this in turn leads to an economic cycle. It i buy your service, you make money, then you will spend the money you have made, buying something from another business and so on.

This is healthy for the markets, but sometimes it can become to good leading to something i call ‘ boredom’ in the markets.

So if the interest rates go up – we borrow less and in turn spend less- this will lead to slower inflation and slow economic growth.

If the interest rates go low – we will borrow more money, spend more money, and risk more leading to an increase in econimic growth this will increase the inflation.

This is what affects a currency, The interest rate will dictate the flow of global capital that goes in to a country, but also out of a country. Meaning a country will buy more services from other countries, but also sell more services to other countries.

This is what investors look for when it comes to the fundamental aspect of a currrency. They are looking for an investment to buy and hold for months to years.

So the higher a countries interest rate is the more likely the currency will increase in strength. if a contry has low interest rates, it is more likely to weaken over the long term. Keep that in mind , it will not affect short market cycles. It takes tiem for the market to setup for that. Because as we said in the market cycle chapter. it has to go through the 4 stages.