Currency trading fundamentals Flashcards
International Fisher effect
An economic theory that states that an expected change in the current exchange rate between any two currencies is approximately equivalent to the difference between the two countries’ nominal interest rates for that time.
Calculated as:
International Fisher Effect (IFE)
E = [i1 - i2 ]/ (1+i2)
Where:
“E” represents the % change in the exchange rate
“i1” represents country A’s interest rate
“i2” represents country B’s interest rate
For example, if country A’s interest rate is 10% and country B’s interest rate is 5%, country B’s currency should appreciate roughly 5% compared to country A’s currency.
What is CPI?
CPI can be a good measure of government’s effectiveness. Fed Reserve, Congress and gov’t use this indicator to form economic and monetary policies.
Other economic series are deflated by the CPI number in order to give the price series in Inflation free dollar. These series include Retail Sales, hourly and weekly earnings, Components of National Income and Product accounts. It is also used as a means of adjusting dollar values (for millions of people’s income, social security benefits, government programs etc). CPI is also used to adjust Federal Income tax structure.
Whose buying habits does the CPI reflect?
All Urban consumers, urban wage earners and clerical workers. This group represents about 87% of the US population.
The CPI doesn’t capture people living in rural areas, farm families, Armed Force members, and people living in institutions like prison/mental hospitals.
