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Most Central Banks maintain a "benchmark" interest rate. Depending on the jurisdiction, the Central Bank rate serves as the guide for the rate at which the Central Bank and other commercial banks lend each other funds to meet short-term operational needs. Commercial lending rates are also affected by the Central Bank rate, and it is this linking of short-term rates to the commercial rates that makes interest rate policy the primary monetary tool for Central Banks. As noted earlier, the Central Bank can increase rates during periods of high growth (inflation) in a bid to reduce consumer spending which should help bring growth back to a more manageable level. If deflation is a problem and the economy needs a boost, Central Banks can lower interest rates to entice more consumer lending. The expected outcome is that overall consumer spending will increase as consumers have access to less costly loans. Forex traders in particular pay close attention to changes in interest rates as investors tend to seek out currencies offering higher returns and this demand can cause a currency to appreciate. Also, the greater the interest rate differential between two currencies, the greater the profit potential of a carry trade strategy. See Trading Strategies and Best Practices in Lesson 4 for more information on carry trades. View current stats

Yield is the interest on fixed-income securities which includes such investments as futures contracts and government bonds. Referred to as "fixed" income because the payment stream (the yield) remains constant until maturity. For example, a simple 5-year bond with a 3 percent annual yield, would pay $300 a year for the next five years on an initial $10,000 investment. The yield curve shows the relationship between the yield, and the time to maturity. When dealing with fixed-income securities, investors want to ensure that the fixed yield remains profitable right up until maturity. As an investor you may be happy with a 5 percent return when the basic lending rate is 2 percent. However, if short-term interest rates rise and the lending rate jumps to 6 percent, your 5 percent return is no longer so attractive, and there are probably other options that could generate more income for your investment. Liquidity spread is the term used to describe the difference between the yield and short-term rates. If short-term interest rates rise above the fixed yield, the bond holder is said to be in a position of negative liquidity spread. When plotted on a chart, the yield is represented along the y-axis, while time to maturity is charted vertically on the x-axis. This results in a yield curve shape that some investors suggest offers insight into future interest rates. Consider the following so-called "normal" yield shape: U.S. treasury bills - or "T-bills" - are a form of debt issued by the U.S. government. The maximum maturity is one year, but the 3-month T-bill is a popular choice for short-term investment. Unlike bonds that pay a regular, fixed-rate amount, T-bills are sold at a discount to par (the "face" value). At maturity, the buyer receives the full face value of the T-bill. For example, if an investor buys $10,000 worth of T-bills for $9,900, at maturity, the investor receives $10,000. The difference - $100 in this case - is the yield earned by the investment.

Compares the total value of imports to the total value of exports for a reporting period. A negative value indicates that more goods were imported than were exported (a trade deficit) – while a positive trade balance means that exports exceeded imports (a trade surplus). If the balance of trade shows a surplus or declining deficit, then there may be an increased demand for the currency. If the report shows a growing deficit, then the increased supply – together with a decrease in demand for the exporting currency – could lead to a devaluation against other currencies. View current stats