It used to be a pretty obvious calculation; the interest rate goes up and the currency of that country strengthens; the interest rate goes down and it weakens. But things are not quite so clear-cut these days. Changes in perception are more influential now that interest rate changes are themselves, much rarer. Nevertheless, it all has an impact on your international transfers and that can be significant if you are on a fixed income.
Since the economic crash of 2007/08, interest rates around the globe have slumped and remained at virtually 0% in many domains. In the US, the base rate is a variable 0-0.25%, in the Eurozone 0.05%, in the UK 0.5% and in Japan 0.1%. There are exceptions of course; Australia is sporting a 2.0% base rate and New Zealand is higher still at 2.75% but these are still record low levels for the countries involved.
What is more relevant is that many interest rates have remained at these exceptionally low levels for 8 years in some cases while the economic recessions and then the fragile recoveries have taken place. So, as it is pointless for traders in the foreign exchange market to focus on actual interest rate changes, they have resorted to speculating based on the perception of the date of the next change and that is moving exchange rates.
The big two, as far as the UK is concerned are the US Federal Reserve and the Bank of England. Whilst, for obvious reasons, the BOE’s interest rate decisions directly impact the Pound, the Federal Reserve’s rate setting plans have a more substantial global impact and that indirectly affects Sterling. The $4.5 trillion of cheap money the US central bank has poured into the US economy over the last 8 years has fuelled not just the balancing of the US economy but rises in stock markets across the globe as well. Any tempering of those sums or the straightforward action of making borrowing in USD more expensive will reverse some of that positive impact.
The knock on effect is that what the US Federal reserve does will have implications for sentiment in the financial centres around the globe. As London is by far the largest of these centres, when Fed Chair Janet Yellen finally does pull the trigger and start the rise in US interest rates, we will all be buffeted by the ripples.
How that will manifest itself is not certain but the joint effects of growing confidence in the US and concern over the fragility of investor markets elsewhere will undoubtedly cause volatility in all markets. In equities and bonds, volatility is seen as a negative whereas in foreign exchange markets, volatility means buyers can capture the top of a spike and sellers can offload their currencies at the bottom. If well managed, it can be a win-win but that is the challenge and, as with so many things in life, from boilers to cars and from electrical to legal matters, most people who need to exchange funds can improve their lot through the help of a specialist.
To find out how you can take advantage of positive fluctuations in the market and exchange your currency at the right time to get the best possible rate, call 020 7350 5474 or visit www.halofinancial.com
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