The relationship between interest rate and currency
Commonly known that interest rates in a country has a direct influence on the price fluctuations of major currency pairs are related. In principle states that the smart money follows the high interest rates. Large companies and institutions tend to shift their liquid assets in the currency of a country with a higher interest rate.
For example, suppose that the growth rate in the United State was 5.0%, while the UK has an interest rate of 4.75%. At a time such as the UK announced to raise its interest rate to 5.75%. Say Hikamirz Co. is an importer or exporter of goods durable goods for the American public and English. After the the British’s interest rate increase, the company would choose to storage their money in UK bank, because it is more profitable. For example, the company would to purchase 10 million units of currency pairs GBPUSD, to lengthen pound and shorten the dollar.
The relationship between balance of trade and currency.
Balance of trade (BOT) is formulated as follows:
BOT = Export-Import
The hypothesis’ balance of trade is an increase in the trade deficit of the country which led to a proportional decrease in the country’s currency. Conversely, increases in a country’s exports exceeded from import value will led the country’s currency also increased.
Consumer Price Index (CPI)
CPI is an indicator of the most common inflation and often used as a measure of the success of a government policy. Basically, the CPI is a statistical measure for an average of prices of a specific set of key goods and services purchased by urban wage producers. This price is a price index that provides a measure of inflation and cost of living index. CPI can be used to measure changes in prices for all goods and services purchased for consumption by urban households. User costs such as water and tailor services, sales, and withholding tax paid by the consumer are also included. While the income tax and various types of investments (such as stocks, bonds, life insurance, and property) are not included.
Indicates the rise in CPI inflation rates probably causing the interest rates increases and the prices of bond will decrease. In line with the increase in the CPI will likely increase the value of the currency of the country concerned.