Foreign Exchange Swaps - Calculating Interest On Forex Trades

One of the beauties of Forex trading lies in the ability to trade using leverage, which is often as high as 1,000 times your capital. In other words, you can effectively borrow up to 1,000 times your capital in order to trade. But borrowing money to trade is no different to borrowing money for any other purpose and you will be charged interest.

However, because every transaction involves both buying and selling currency, interest payments payable on money borrowed to fund a transaction can be offset by interest earned on the currency held. If this seems a little confusing we'll look at an example in a moment, but first it is worth just taking a moment to examine the subject of interest rates in general to see the wider picture as it affects the Forex market.

These are established by central banks and are used to regulate a currency in order to meet a country's monetary policy. Interest rates directly affect the cost of a currency with high interest rates making it expensive to buy a currency and low interest rates making a currency more affordable.

As a tool of monetary policy the government of a country facing high inflation, with the price of goods and services rising rapidly, might choose to raise interest rates. This would have the effect of raising the cost of currency so that borrowing becomes more expensive and both demand and consumption fall. Following the normal laws of supply and demand, as demand falls, so the rate at which prices rise will also fall and inflation will come down.

By the same token, a country facing recession might well choose to lower interest rates in an effort to stimulate the economy into growth. As the cost of the currency falls, so too will the cost of borrowing and investors, companies and individuals will be encouraged to borrow and thus spend more, so increasing demand and stimulating supply to meet that demand.

Interest rates established by central banks determine the rate at which commercial banks can borrow from the government and thus the rate at which they will lend to their customers, including Forex traders.

So just how do interest rates impact individual Forex trades?

Suppose a trader buys GBP/USD at 1.9430. In this case he is borrowing US Dollars to buy UK Pounds and is thus paying interest on the US Dollars he has borrowed and is earning interest on the UK Pounds which he holds.

If the Bank of England has set a higher rate of interest for the UK Pound than the Federal Reserve has set for the US Dollar then the trader has the opportunity to earn more in interest on the UK Pounds that he is holding than on the US Dollars he had borrowed.

However, unless interest rates are particularly high on one currency and the differential between the two rates is significant, any net gain or loss is likely to be small. It should also be borne in mind that interest rates are set at an annual rate and that most currency trades are conducted over short, or extremely short, time frames. This again will reduce any interest gained or paid considerably.

What Influences Forex Prices?

Foreign exchange rates influence the fundamental situation of other markets. In general they reflect the strength or weakness of a particular economy. There are certain factors that directly influence forex prices. These factors generally fall into three categories: economic factors, political conditions and market psychology. Economic factors include economic policy of that particular country circulated by government agencies and central banks, economic conditions prevailing in that country and other economic indicators. The market usually reacts negatively to expanding government budget deficits, and positively to reduction in the budget deficits. The trade flow between a set of countries illustrates the demand for goods and services that also indicates demand for a country's currency to conduct trade. Any currency loses value if there is a high level of inflation in the country. The gross domestic product (GDP), employment levels, retail sales, capacity utilization etc. denotes the level of a country's economic growth and health.

Internal, regional, and international political conditions and events of any particular country can have a profound effect on the forex prices. Market psychology and trader perceptions influence the forex prices in different ways, unsettling international events can lead to a greater demand, thus a higher price, for currencies considered as stronger over their relatively weaker counterparts. Beside these there are some other factors also, that influence the forex prices.

Interest rates play a major role when the idea of evaluating one currency against another comes in to play. The interest rate determines the capacity of earning for a particular currency. Inflation influences the interest rates greatly. If interest rates of country are rising because of a healthy economic growth that is a positive sign for the currency. It has to be kept always in mind that the value of a particular currency always reflects its buying power. The forex market came into the existence to facilitate trade only, and trade is a major factor in the determination of the value of a particular currency. More demand of the goods means higher values for that currency. This influence forces the forex dealers keep a close watch on the international trade data. Capital flows indicate the investment of capital in that country. Investment also works on the same pattern as trade. If a country receives a lot of investment its currency would be in great demand. The forex dealers look at the capital flows in the same way as they look at the trade data.

The US Dollar is always treated as a reserve currency internationally; other countries keep a healthy supply of Dollars on hand as a precaution against any future adversity. This always propels the demand for the Dollar as all of the major global commodities like oil and gold are denominated in Dollars. Any country buying such commodities has to exchange their own currency for Dollars in the first place to make a purchase; this always increases the demand for the Dollar.

Looking at one country or currency is not enough for any dealer because a currency is always valued and traded against an array of other currencies having their own sets of considerations. Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. If the supply of any currency shows the shortage in the forex market then the prices for the same would rise on the other hand if the supply is in a very healthy condition and the demand is very low for that currency then the prices for that currency bound to fall. This is the major conclusion of all above and the forex dealers keep a cautious eye on this fact patiently.

Forex Point and Figure System Looks at Commodity Currencies

Commodities are all the rage today among traders and investors. The multi-year rallies in crude oil, gold, natural gas, silver, copper, wheat, and other commodities is casting a spotlight on the sector. But did you know that you can play the commodity bull market via the forex market?

The countries that export large quantities of commodities are enjoying tremendous rallies in their currencies. The reasoning for this phenomenon is quite simple. Consider the following scenario.

A refiner in the United States needs some crude oil to turn into gasoline and diesel. This refiner can't find any oil for sale in the United States, so it turns north and looks for a supplier in Canada. It just so happens that a driller in Canada is sitting on hundreds of thousands of barrels of oil that it needs to sell. The U.S. refiner contacts the Canadian driller and arranges for payment and transportation of the crude oil. In order to complete the sale, the U.S. refiner needs to convert his U.S. dollars into Canadian dollars. The transaction is the equivalent of selling U.S. dollars and buying Canadian dollars.

This transaction is taking place in many different forms all across the world as countries that need commodities are buying from countries that produce the commodities. The commodity producing countries are seeing an unprecedented demand for their currencies.

One of the major players in the global commodity boom includes Canada, which is a resource rich country. Canada is a major supplier and producer of fossil fuels, including crude oil and natural gas. Additionally, the country exports a lot of timber, wood pulp, aluminum, and fertilizer.

Another major force in the global commodity boom Is Australia. The country exports a tremendous amount of metals, including gold, iron ore, coal, wheat, and wool. Neighboring New Zealand, although small in terms of GDP and population, is also a major force in the global commodities trade. New Zealand is a major exporter of food products, specifically dairy, meat and fish. New Zealand exports most of its commodities to Australia, the U.S., Japan, and China.

Norway is emerging is a major force in the global commodities boom because of the country's rich oil deposits. Norway exports over 3 million barrels of oil per day, mainly to the U.K., Germany, the Netherlands, France, and Sweden.

With the prices of crude oil, natural gas, and food rising, you can now see how currencies like the Canadian dollar, Australian dollar, New Zealand dollar, and Norwegian krone are strengthening. As the prices of these commodities continue higher, so too will the currencies of the countries that export these commodities. It's due to the simple principles of supply and demand. The demand for the currencies of countries that export commodities increases due to the foreign exchange that must take place in order to trade these commodities.

The trends in commodities and the commodity-related currencies are far from over. You can learn how to identify these trends, and profit from them, right in the forex market. By simply knowing which countries export what commodities, you can join the commodity bull market and profit.