What makes a currency have an interest rate? | Forex Factory

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What makes a currency have an interest rate?

  • #1
  • First Post: Aug 26, 2012 2:27pm Aug 26, 2012 2:27pm
The only way that I see that makes this possible is if buying a currency is the same as buying overnight debt (and then subtract the prime rate of the other currency). Is this it?

But what about CFD's on commodities? I don't know about other brokers, but in Oanda commodities CFD's have interest (which can be positive or negative). How can I receive interest from buying a commodity?
  • #2
  • Aug 26, 2012 10:27pm Aug 26, 2012 10:27pm
The central banks determine at what the rate is set. The main reason for rates IMO is to control inflation among other things.

Banks that need liquidity over night get charged this rate by the Central Bank. There is more than one rate but this just a basic understanding. (I am not a central banker lol)
  • #3
  • Aug 27, 2012 3:09am Aug 27, 2012 3:09am
Quoting Jasus
The only way that I see that makes this possible is if buying a currency is the same as buying overnight debt (and then subtract the prime rate of the other currency). Is this it?

But what about CFD's on commodities? I don't know about other brokers, but in Oanda commodities CFD's have interest (which can be positive or negative). How can I receive interest from buying a commodity?
yeap.. in forex is something like that.

If you buy 50 000 euros in dollars (buy eur/usd 0.50) say at 1.2510, you borrowed 62 550 dollars- So now you have 50 000 euros and a debt for 62550 dollars.

If you keep it overnight, the Brokers charge you the interest rate of your loan according to the interest rate of the currency you borrowed.. but pays you the interest of the currency you are holding... the net could be positive or negative.

If you buy 62 550 dollars in euros (sell eur/usd 0.50) You borrowed 50 000 euros and hold 62 550 dollars ... same thing ... but this time your loan is in euros, the euro rate apply to your loan ... etc...something like that


j.
  • #4
  • Aug 27, 2012 2:08pm Aug 27, 2012 2:08pm
Good question. The book says: a foreign exchange rate is a swap of interest rates denominated in different currencies.
That's it. Nothing about exporters wanting to hedge their exposure, nothing about banks or specs trading for profit, nothing, just a swap of interest rates. So: yes, you can look at it this way.

Quoting Jasus
The only way that I see that makes this possible is if buying a currency is the same as buying overnight debt (and then subtract the prime rate of the other currency). Is this it?
forget about tomorrow, just steal away into the night
  • #5
  • Aug 27, 2012 2:15pm Aug 27, 2012 2:15pm
It depends on how the commodity relates to the USD, buying and holding GOLD overnight will give you a negative ROLL, obviously b/c benny and obama want you buying dollars. Most are neg roll.



On the other hand the RBA, pays a hefty 3.50% down from 4 to just hold their currency overnight. No you can't buy at 4:59 with most brokers.


Quoting Jasus
The only way that I see that makes this possible is if buying a currency is the same as buying overnight debt (and then subtract the prime rate of the other currency). Is this it?

But what about CFD's on commodities? I don't know about other brokers, but in Oanda commodities CFD's have interest (which can be positive or negative). How can I receive interest from buying a commodity?
XAU-XAG/USD_Gold n Silver Trader's Thread = Technicals, Fundamentals & News
  • #6
  • Aug 27, 2012 2:17pm Aug 27, 2012 2:17pm
Yes this is correct.

this is why the YEN sucks as a carry trade due to the ov rate and the aussie and kiwi pay best. Holding USD LOL LOL HAHAHA

Quoting jeuro
yeap.. in forex is something like that.

If you buy 50 000 euros in dollars (buy eur/usd 0.50) say at 1.2510, you borrowed 62 550 dollars- So now you have 50 000 euros and a debt for 62550 dollars.

If you keep it overnight, the Brokers charge you the interest rate of your loan according to the interest rate of the currency you borrowed.. but pays you the interest of the currency you are holding... the net could be positive or negative.

If you buy 62 550 dollars in euros (sell eur/usd 0.50) You borrowed 50 000 euros and hold 62 550 dollars...
XAU-XAG/USD_Gold n Silver Trader's Thread = Technicals, Fundamentals & News
  • #7
  • Last Post: Aug 28, 2012 10:23am Aug 28, 2012 10:23am
Quoting XTrade
Yes this is correct.

this is why the YEN sucks as a carry trade due to the ov rate and the aussie and kiwi pay best. Holding USD LOL LOL HAHAHA

I guess you didn't like my example for huu .
No one is discussing what currency to hold not to hold .. nor even carry trade was mentioned by the starter of the thread. Just a plain example and some clarification that is not "buying" overnight debt, but paying interest by having Incurred in a debt that is kept overnight.

Sure.. who would like to hold USD for carry trade purposes??. No one.
Actually, I think the whole carry trade thing has been over for a while.

J.
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