From the Basics You Need to Know: Fundamentals Course by “Market's Chronicler” Koichiro Amaya — Part 5: The Impact of Interest Rates and Inflation on the Market
In FX, many people use technical analysis for market analysis, but to analyze and judge the market accurately, fundamentals are indispensable. Here, we will have Koichiro Amaya explain the depth and use of fundamentals, so let's learn properly along with EMA Itan.
Instructor: Koichiro Amaya
Koichiro Amaya. For over 20 years, he has held key foreign exchange roles at major foreign banks such as UBS, JP Morgan, and BNP Paribas. He has a track record of ranking highly in Tokyo’s popular FX dealer rankings in the financial trade publication "Euro Money." In 2006, he became a freelance financial analyst, providing FX market information to FX companies and portal sites from his sharp, independent perspective.
Participants: EMA Itan
EMA Itan. He loves trend-following trading and works to convey the greatness of trend-following. But sometimes he also does contrarian trading.
Official site:EMA Itan’s Blog
*This article is a republication/edit of an article from FX攻略.com, October 2019 issue. Please note that the market information in the main text may differ from the current market.
You can read currency movements by analyzing interest rates
ItanLast time, we learned the importance of the U.S. employment statistics and the Federal Open Market Committee (FOMC) statement. This time, we’d like Mr. Amaya to explain the relationship between interest rates, inflation, and the currency market.
Those of us who analyze the forex market focus more on interest rates than on the currencies themselves. The forex market always moves while watching other markets and rarely moves on its own. Most forex market moves can be explained by interest rates and stocks. By understanding fundamentals, you can explain why the market is moving. This is because the current market is a continuation of the past. Since the market moved for these reasons in the past, you can predict that it will move in this way in the future. This is the most important aspect of fundamental analysis.
ItanWhat does it mean to analyze interest rates, and why are they important?
AmayaInterest rates are the profits that can be earned from a currency itself. For example, when you buy the U.S. dollar, you earn the dollar’s interest rate. If the interest you can earn increases, that currency becomes more popular. Therefore, it is reasonable to assume a positive correlation between interest rates and the exchange rate. In other words, currencies with high interest rates tend to be more popular and bought. However, high-interest currencies have reasons for their high rates. There are nominal interest rates and real interest rates. Nominal interest rates include inflation, while real interest rates exclude the erosion caused by inflation. This time, I would like to explain this distinction.
