Interest rate differential between Eurozone and US just rose after ECB rate hike

Discussion in 'Economics' started by ASusilovic, Jul 7, 2011.

  1. What Does Interest Rate Differential - IRD Mean?

    A differential measuring the gap in interest rates between two similar interest-bearing assets. Traders in the foreign exchange market use interest rate differentials (IRD) when pricing forward exchange rates. Based on the interest rate parity, a trader can create an expectation of the future exchange rate between two currencies and set the premium (or discount) on the current market exchange rate futures contracts.

    The IRD is a key component of the carry trade. For example, say an investor borrows US$1,000 and converts the funds into British pounds, allowing the investor to purchase a British bond. If the purchased bond yields 7% while the equivalent U.S. bond yields 3%, then the IRD equals 4% (7-3%). The IRD is the amount the investor can expect to profit using a carry trade. This profit is ensured only if the exchange rate between dollars and pounds remains constant.
  2. Tsing Tao

    Tsing Tao

    It was completely priced in. However, this is likely the top for now, so you have to wonder about the intelligence of a central bank that raises rates from 1 to 1.5 to combat inflation (like that will do it). If they raise more, the PIIGS will be squealing.

    So this was more likely a token nod to the Webers of the world.

    Let's all remember JCT's brilliant raising of rates in the summer of 2008. That worked out well.
  3. Yep, those Spanish and Irish mtges suddenly got a little bit more painful.
  4. Tsing Tao

    Tsing Tao

    Chant with me...

  5. Caja is yesterday's biz. The new name is Bankia. Long live Bankia!