Understanding Interest Rate Differentials (SHAREFOUNDERS BROKER)


In this article, the team of experts of Sharefounders broker will look at the percentage difference in currencies and how it can be used.

The interest rate difference is the percentage difference in the currency. If one currency has a 3% rate and the second one has a 1% rate, then the difference will be 2%. It is necessary to monitor the difference in currencies in order to get the maximum benefit from the transaction.

If you are buying a currency with a rate of 3% against a currency with a rate of 1%, you will have to pay the difference with daily interest payments. This is also called a portable transaction that generates income by the difference in interest rates. But in recent years, a new trend has appeared. It is called a negative interest rate.

The Emergence Of Negative Interest Rates (NIRP)

At the beginning of 2014, economists began to notice a big difference in interest rates between the currencies of developed countries and countries that are just developing. Most advanced economies set interest rates below zero to increase demand while developing countries raised interest rates to stabilize the country's economy. For example, in February 2016, the Bank of Mexico (Banxico) raised the borrowing rate by 50 basis points when selling US dollars at a market rate. This was done to increase demand for the Mexican peso, which was rapidly falling.

Although this situation occurred only between Mexico and the United States, it still caused concern among economic experts around the world.

Carry Trade

Traders want to use the maximum negative interest rate policy in the carry trade. They performed it by selling negative interest rate currencies and buying emerging market currencies.

But the Sharefounders broker draws your attention to the fact that this is a very risky strategy. Despite the possibility of high earnings on the carry trade system, the risk of losing funds is also very high.

The phrase - "too good to be true" - may refer to a large percentage difference in rates. Sharefounders broker experts ask you not to forget that the big difference in interest rates is most likely due to the unstable economic situation of the country that lowers interest.

Starting in 2019, trade disputes between China and the United States have had a very serious impact on the most profitable currencies. At the same time, developing and unstable markets continue to lower interest rates in order to protect themselves.

The Sharefounders broker strongly recommends you to check all the information about the markets, where you are going to trade. If you have questions or doubts about a particular platform, be sure to consult with a trusted broker such as a Sharefounders broker.

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