One of the big questions that traders should be asking themselves as they prepare for a new year of financial activity is just what is going on with negative interest rates? On a very basic level, this is an odd scenario where investors are essentially being charged for borrowing money. The main line of reasoning is that this is helping several central banks to stimulate economic advancement and growth within their respective economies, and over the last few months, this has worked. Going into the future, the actual outcome is pretty murky.
Having interest rates at zero or below is completely foreign territory over the long run, and it presents a great lesson for Forex and binary options traders at all levels.
As of the most recent estimate, over $12 trillion (USD) has been lent by banks at a negative interest rate. Experts in the world of finance know that this is dangerous, but they are not really at an agreement what will happen long term for this large amount that is out on loan. The consequences appear to be well handled for now, but this is still new territory, especially in major economies like Europe and Japan. If there are negative consequences, you should be prepared to act quickly and set up trades that will be profitable based upon this information.
The Forex market is the area that will be most heavily impacted by interest rates, but as any trader with experience will quickly observe, that doesn’t mean that it is the only area that will be impacted. When currencies move, it is inevitable that the markets that use a particular currency will move, too. In economies like the United States, this is a simple act. When the U.S. dollar goes up in value, the stock market will drop as a result. The cost of the dollar has gone up, so there is more immediate value in holding onto your greenbacks than there is to put it into a company or a fund.
The Forex market though, the currency pairs that represent business done between countries, is our starting point for understanding how to profit off of unknown territory like what we are seeing with negative rates. This should keep money flowing into businesses in the areas where negative interest rates occur. However, this doesn’t mean that bad businesses will thrive, and it doesn’t guarantee that great businesses will, either. However, it makes both of these things more likely. When this truth changes, then the bad business models fail, and the great business models are more likely to stay profitable. If you are going to venture into stocks and indices, know that monetary policy doesn’t translate perfectly into this market, but it does have an overall blanket influence. When policy changes, individual nuances between different assets determine exactly what will happen. Trader psychology also plays a large part in what happens.
In stark contrast to struggling markets, we can look at the Federal Reserve, the central bank of the United States. We see the Fed raising rates on U.S. treasury bonds, and we see how even the idea that this is going to happen soon can give the USD a big boost upward. Observing this action should provide a starting point for how we treat any sort of rate action in other countries. However, do keep in mind that this is a very complex topic, and this explanation is a simplified version of what happens at best. All trades need to be examined on an individual basis if you want to see the best results possible in your own trades, however you make them.