I am a long time Stock and Options trader and I have a question that’s been bothering me about currency trading in regards to rate cuts.
Stock markets go up (which is considered bullish for the underlying currency) on rate cuts but yet on rate cuts currencies go down.
It seems the reverse would be true or is it simply that a rate cut regardless of stock movement is always more negative for currencies than the corresponding move up in equities?
I should mention even though the underlying dynamic is confusing for me as an experienced stock trader, I do know enough from reading about currency trading and news that I placed some shorts on the pound this morning after the rate cut by the BOE and was up +65 pips.
I think you should look at this like a scale, each factor might tip the scale in opposite directions, but one side dominates in this case.
While the stock market may be an indicator of the overall economy, it is just that, an indicator.
However, interest rates effect the demand for a currency DIRECTLY, via carry trades, swap, carry-over or whatever you want to call it. If the interest rate drops, it’s less valuable to hold, and therefore the demand for it decreases, dropping the price.
All other things being equal, lower rates means a weaker currency. That, of course, assumes other countries aren’t lowering theirs too.
It’s definitely worth saying, though, that the announcement of a rate move will not automatically move the market in the direction you would expect. For example, if the market is expecting a rate cut, and the cut happens, there will generally be little meaningful weakening in the currency. Actually, in some cases it might strengthen.
