Daily Interest rates in focus

Two of the three US markets closed up yesterday with the Dow Jones Industrial average closing even and the S&P 500 as well as the NASDAQ both gaining slightly. The perpetual depressant, the Nikkei was, true to form, down as the European indices are truly directionless with the FTSE down and the DAX, CAC MIB and Ibex up though hardly in a runaway fashion. This mixed directionality of the different markets around the world is indicative of uncertainty. There is no obvious direction traders are taking and therefore we have some markets up and some down. A common thought on this phenomenon is that traders are waiting for results of the announcements this week, in order to see whether their anticipation of further stimulation in the form a reduction in the cost of cash (interest rate) materializes or evaporates.

The US dollar Index, a trade weighted index of a basket of seven industrialized economic zone currencies against the US dollar is rising, in what may foreshadow a no rate cut at all. This would be the likely market reaction where the interest rate in the US NOT to be reduced. It could have the effect of attracting further demand for the US currency as it would be paying a higher rate of interest than its trading currency competitors. Called the “carry trade” it is a simple, relatively safe and widely practiced trading strategy of simply placing your capital in the currency that pays the highest rate of interest and do nothing with it at all but let it collect that interest. The dollar could indeed strengthen should the central bankers hold firm and not reduce rates.