FX Trader's Basic Course for Adults: Episode 2 - Fundamentals of Interest Rates ~ Part 1 [Kotaro Ameya]
This企画 enables systematic learning of fundamentals (analysis). Last time, we learned about the basics of fundamentals. The theme for the second installment this time is “The Basics of Interest Rates.” Many traders may think they understand interest rates, which have a close relationship with the exchange market. We will have Koichiro Amaya explain it in an easy-to-understand way, so let's firmly acquire the knowledge here.
Table of Contents for the Second Session
1. What exactly are interest rates?
2. Why do interest rates exist?
3. Why do interest rates rise and fall
4. Determinants of interest rates
5. Economic indicators to watch
6. High-interest-rate currencies and low-interest-rate currencies
7. Nominal interest rate and real interest rate
8. Summary of the second session
Koichiro Amaya (Amaya Kōichirō) Profile
He has held senior FX positions at major foreign banks such as Credit Suisse, JPMorgan, and BNP Paribas for over 20 years. He has ranked high in the Tokyo FX market popular dealer rankings in the financial magazine EuroMoney. In 2006, he became a freelance financial analyst and now provides FX market information to FX companies and portal sites with his sharp, independent perspective.
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What are interest rates in the first place?
Fundamentals Basics Lecture Part 2, the topic this time is “The Basics of Interest Rates.” The biggest focus in the currency market this year (2017) will be how U.S. interest rates move under the Trump administration. Interest rates and the exchange market are so closely linked that reading the exchange market starts with reading interest rate trends, no exaggeration.
Therefore, in this article, we will clearly explain for FX beginners: “What exactly are interest rates?,” “How are interest rates determined?,” and “How do interest rates affect the currency market?”
When asked, “What is interest rate?” you might be at a loss. Interest rate is the fee that borrowers pay lenders, in other words the usage fee or rental charge for funds, generally expressed as an annual rate relative to the principal.
Interest rates have various terms such as rate, interest rate, and interests, and are often used interchangeably, but strictly speaking, those expressed as a percentage or rate are “interest rate or rate,” while those expressed as an amount are “interest or interest income.”
In the investment world, there is the term “yield,” which refers to the total return from a financial product (including not only interest but also changes in principal and fees), annualized—that is a completely different concept from interest rates or yields.
