Gold Prices Slide into Swing Support. Trend-Line Support as New Resistance.
One of the, if not the most important indicator of price changes in financial markets are interest rates. Interest paid, or accumulated guides many of the decision making processes that take place in financial markets.
Interest is opportunity cost, motivation, and a support mechanism all at the same time. Central bankers govern an economy in an attempt to ensure financial stability. After The Great Depression was initiated by Black Tuesday October 29, it became clear that politicians and policy makers did not want to leave economic prosperity to luck and chance.
They wanted to be able to control the economy in an effort to prevent another Great Depression. The Federal Open Market Committee FOMC was created within The Federal Reserve in response to The Great Depression with the Banking Act of The FOMC has been charged with the mandate of setting target interest rates for the United States economy.
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They do this by modifying the Federal Funds Rate the rate that banks charge each other for overnight loans. They would then borrow the money so they could in-turn, loan it to you. Two years down the road, rates are even lower! Federal funds rate is down to. Your friends who had bought a home around the same time as you realize that this opportunity is too good to pass up. They refinance their home too. Not only that; your friends that have been renting houses have been doing some math too.
They found that they could get more space at a much lower price with these new lower interest rates. They tell their friends about it, and before you know it the real estate market is red hot.
Using Yield Curves to Forecast FX Rates
Investors from outside of the United States are starting to take notice of these rapidly increasing home prices and they want in on the action. Investment groups across the globe cash in their investments to buy American real-estate with the goal of selling it down the road at a higher price.
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They exchange their foreign investments so that they can buy dollars and, in turn, purchase American real estate. Many forex transactions can be taking place here. Japanese investors are selling their Yen to buy Dollars to invest in American Real Estate. This is similar to what happened with the financial crisis.
Record low rates for an extended period of time saturated real estate markets with speculators until almost any person that wanted a home had one. Some had two, or three. Eventually, there was no one left to buy.
So, the sell their real estate investments, and look for the best place to park their money. After perusing the global economic picture, our investors see that one of the highest yields in the world is coming from the continent of Australia. Large Gold deposits and a strong exporting relationship to China have allowed the continent to continue to grow, seeing the highest interest rate in the land. So our investors affect another transaction.
But after seeing the profit that was accrued during the early portion of the real estate deal in the U. This affects more currency transactions so that these investors can obtain Australian dollars to transact their investments. The below chart shows how powerful interest rates can be to a currency. As price continued to climb we have further evidence of foreign investment pushing prices higher in an effort to receive this higher interest rate.
Bond Spreads: A Leading Indicator For Forex
Investment follows expected yield. If rates are expected to increase, we can often see accumulation of that currency in an effort to get the higher expected yield and this can elevate prices even higher. To contact James Stanley, please email Instructor DailyFX. You can follow James on Twitter JStanleyFX. Support and Resistance — On-Demand Video Course.
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Get Your Free Trading Guides With your broad range of free expert guides, you'll explore: News getFormatDate 'Wed Jun 21 News getFormatDate 'Tue Jun 20 Bond Yields And Their Relationship to FX getFormatDate 'Mon Feb 06 Bond Yields And Their Relationship to FX One of the, if not the most important indicator of price changes in financial markets are interest rates.
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