Why negative rates are meaningless to currency traders

Economic theory suggests low interest rates should decrease the value of a country’s currency — but one veteran strategist told CNBC that central banks’ adoption of negative rates was “meaningless” for the foreign exchange markets.

Several major central banks have introduced negative rates in a bid to stimulate the economy and persuade businesses and households to spend and invest rather than save. Notably, the European Central Bank now has a deposit rate of -0.4 percent, while the Bank of Japan has a deposit rate of -0.1 percent for some reserves.

In theory, lower rates decrease the value of a country’s currency, suppressing the yield available, and making it less attractive to foreign investment and for foreign exchange traders to hold. But with the adoption of ultra-low interest rates across the developed world, small differences between currency yields may be more significant than the fact that one central bank has breached the zero-mark and adopted negative rates.

“All we are interested in in FX is the differential. If you want a carry trade you sell low-yielding currencies; buy a high-yielding currency and you get paid every day to own the position,” David Bloom, the head of foreign exchange research at HSBC, told CNBC on Tuesday.

“Negative rates are always and everywhere in FX. They mean nothing to us,” he later added.

The use of negative rates has attracted criticism from economists like Joseph Stiglitz and policymakers like German Finance Minister Wolfgang Schaeuble. This month, the latter blamed the European Central Bank’s monetary policies for driving German voters towards extremist political parties.

 

Source: CNBC

 

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