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Pricing in?

  • #1
  • First Post: May 6, 2011 10:59am May 6, 2011 10:59am
Hi there

Just a question I've been thinking about.....apologies if it is a basic or laughingly obvious one.

We frequently hear about fx markets 'pricing in' future interest rate changes and the trends which happen as a result. I just wondered whether big players, central banks, market makers etc have notions of what the price/value of a currency should be against another when this 'pricing in' is occuring.......? Is it purely analysis which dictates such things, e.g. a fib level target...? Is it a historical price or big area of S/R......? Is it a historical price when the currency was at the same interest rate level that is now being 'priced in'....? Or is it just a price that people are prepared to pay according to supply and demand................?

Any thoughts welcome
  • #2
  • May 6, 2011 11:38am May 6, 2011 11:38am
Quoting linleysound
Hi there

Just a question I've been thinking about.....apologies if it is a basic or laughingly obvious one.

We frequently hear about fx markets 'pricing in' future interest rate changes and the trends which happen as a result. I just wondered whether big players, central banks, market makers etc have notions of what the price/value of a currency should be against another when this 'pricing in' is occuring.......? Is it purely analysis which dictates such things, e.g. a fib level target...? Is it a historical price or big area of S/R......?...
its called fundamental analysis, you need to learn what drives demand for a currency up and anticipate such events

example raise in interest rate will make a currency more attractive for big player to park their cash reserves as it yields a bigger % for your money

example USD 0.25% yield on money markets, cd accounts etc is to low for 3.5% inflation as opposed to
AUD yielding 4.5% and so on.
also tresurie bills, and bonds give you an estimate of what "SAFE" investments give higher return giving a more attractive appealing currency for investors

keep in mind forex is NOT STOCKS. THE MARKET IS NOT RULED OR DETERMINED BY PEOPLE TRADING CURRENCY.

its determine by demand for the currency in
1 Central bank reserves
2 safe cash flow returns
3GDP (exports, trade surplus) etc
4 employement level
and basically the whole fundamentals of a country


howeve to make it simple just look at what the USA is doing and the movement of the USD.

all other countries sometimes are irrelevant.
AVT INVENIAM VIAM AVT FACIAM
  • #3
  • May 7, 2011 8:21am May 7, 2011 8:21am
Quoting the redlion
its called fundamental analysis, you need to learn what drives demand for a currency up and anticipate such events

example raise in interest rate will make a currency more attractive for big player to park their cash reserves as it yields a bigger % for your money

example USD 0.25% yield on money markets, cd accounts etc is to low for 3.5% inflation as opposed to
AUD yielding 4.5% and so on.
also tresurie bills, and bonds give you an estimate of what "SAFE" investments give higher return giving a more attractive appealing currency for investors...


Hello friend. Thanks for the interesting and informative reply. I'm not sure whether you totally got what I was asking (maybe my question is confused....)....But I wasn't so much wanting to know what drives a currency or the reasons investors put their money somewhere..........My question was rather when future interest rate changes are 'Priced into' the value of an exchange rate, do big market participants have specific notions of what the approximate value of a currency should be???

A simple example to clarify - GBP/USD is say trading at 1.5....fundamentals and mummerings by the BOE are making investors think there will probably be 2 quarter point interest rate increases in the next few months. Sterling begins to appreciate as the new rates are priced in.....how do big market players determine what they consider the appropriate price level for the future new value of sterling v dollar to be? Obviously demand from the market prevails til people consider thngs to be too expensive or inefficient.................but my question was just whether there exists in the minds of market makers etc fair values or some kind of relative pricing structure in terms of interest rate differentials........................
  • #4
  • May 22, 2011 2:26pm May 22, 2011 2:26pm
Quoting linleysound
Hi there

We frequently hear about fx markets 'pricing in' future interest rate changes and the trends which happen as a result. I just wondered whether big players, central banks, market makers etc have notions of what the price/value of a currency should be against another when this 'pricing in' is occuring.......? Is it purely analysis which dictates such things, e.g. a fib level target...? Is it a historical price or big area of S/R......? Is it a historical price when the currency was at the same interest rate level that is now being 'priced...
I think that prices' levels are set by a mix of ALL the causes you have mentioned. No one really knows why the EUR/USD is traded at its current levels and not 10% below. Otherwise everybody could make easy money, and we all know that it is not the way it works. Some says that markets act randomly and any attempt to predict their direction is pointless. In long-term analysis, I believe that it is true, but I do think that powerful central banks can have an impact on prices for short periods, as it was in the Japanese crisis. The trader can take advantage of the powerful interferes to make quick money, and that is the most important thing for us.
  • #5
  • May 23, 2011 9:37am May 23, 2011 9:37am
Examples are below...
Quarter rise in interest rates equals 250 pips pricing in, from where ever price is at the time.

1% = 1000 pips
0.50% = 500 pips
0.25% = 250 pips
  • #6
  • May 24, 2011 2:20am May 24, 2011 2:20am
Quoting jpadventure
Examples are below...
Quarter rise in interest rates equals 250 pips pricing in, from where ever price is at the time.

1% = 1000 pips
0.50% = 500 pips
0.25% = 250 pips


That's more like the kind of answer I had in mind!

Thanks. Where does your info come from though?
  • #7
  • May 24, 2011 3:21am May 24, 2011 3:21am
Quoting linleysound
Hi there

Just a question I've been thinking about.....apologies if it is a basic or laughingly obvious one.

We frequently hear about fx markets 'pricing in' future interest rate changes and the trends which happen as a result. I just wondered whether big players, central banks, market makers etc have notions of what the price/value of a currency should be against another when this 'pricing in' is occuring.......? Is it purely analysis which dictates such things, e.g. a fib level target...? Is it a historical price or big area of S/R......? Is...

Hi linleysound

Very interesting question.....it would be something similar to the fair value of a stock?

I have a suspicion interest rates play a big role in determining this "fair value".

I would also be interested to know whether this is done and how?

Cheers
  • #8
  • May 24, 2011 4:04am May 24, 2011 4:04am
Quoting linleysound
That's more like the kind of answer I had in mind!

Thanks. Where does your info come from though?
No offence, but what he said is incorrect. I think the answer you're looking for lies in the pricing of derivatives. I guess that in theory, consensus on interest rate changes can be deduced from the difference between spot and futures prices.
The nail that sticks out gets hammered back in
  • #9
  • May 24, 2011 6:29am May 24, 2011 6:29am
Quoting Noloqy
No offence, but what he said is incorrect. I think the answer you're looking for lies in the pricing of derivatives. I guess that in theory, consensus on interest rate changes can be deduced from the difference between spot and futures prices.
In practice it doesn't work like that.

Consensus is always priced in into both the current price and the futures price. The difference between them is just the cost of financing the position (the carry cost).

To give an example, if people believe that next month interest_rate/euro/gold/whatever price will increase, both spot and future will go up today, not only the future, because if only the future would go up, you would be able to arbitrage the spread between them (while paying the carry cost).
  • #10
  • May 24, 2011 6:38am May 24, 2011 6:38am
This thread is waaay too complicated.

The question I understand it was, "if the market rumour is, pricing in a 0.25% interest rate increase. Where the hell will price end up?

I answered that. Lesson learned from a popular forex news site.

My opinion is, pricing in is a short term deal, it may overshoot the target as a trend may begin. But, doesn't it rely on an agreement on price? Who exactly are setting these prices, is it the two central banks of an opposite exchange rate?
If so, they can't agree on a price. They have their own interests to take care of first and foremost. I don't believe it's an actionable strategy, except where an obvious rate move is known. Variables are too many.
  • #11
  • Last Post: May 24, 2011 4:00pm May 24, 2011 4:00pm
I dont think anyone derive a price and then trade for it. But there is a formula for calculating a probability of a rate hike.

I dont know much about it too so will stop here and link an old thread but dont know if its still usable or not.

http://www.forexfactory.com/showthread.php?t=6711
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