The Yield Curve is used to predict the future direction of interest rates for a particular country. It is derived by examining the return/rate for like government bonds with different maturity dates. The most common periods to examine are the 1 month, 3 month, 1 year, 2 year and 5 year rates.
Generally speak the yield curve will be upwards sloping indicating that the longer the time to maturity the higher the rate. However, the curve can take different shapes, such as flat or inverted, which also give clues as to the future direction of interest rates.
As the lyrics say in Yazz’s famous song “The Only Way is Up” many an economist would have you believe the same is true of US bond yields. Money printing leads to inflation which leads to higher interest rates they will tell you. Read more >>
A flat yield curve occurs when there is little difference between the interest rates on government bonds for different maturities. For example, the rate on the one month bond might be similar to that of the 3 month or 1 year bond as illustrated in the chart below. Read more >>
In a previous article we looked at how interest rates affect fx rates. If you are not familiar with this concept, you should first review that article before reading on. This article looks at how the yield curve can be used to predict future interest rate trends. Read more >>
In recent times, the USD has been sold off against all major cross currencies. This article looks at why the USD has performed so badly and looks at the future of the Greenback. Read more >>
To answer the question on how interest rates affect foreign exchange rates, you should first refresh yourself on what a foreign exchange rate is. It’s always a combination of two currencies (e.g. USD/AUD or EURO/USD). Read more >>
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