Forex: Yield

Buy when the coloured lines trend higher, sell when they trend lower

This tool indicates the historical relationship and generally expected future development of the variable most closely correlated with exchange rate movements - namely the premium or discount of real domestic interest rates over international levels. Where available, rates at both short three-month and long ten-year ends of the yield curve are shown. For comparability, exchange rates have been rebased to set year-end 1994 at 100.

In each chart the currency index is shown as the thick white line on the right hand axis. The main explanatory variables, short-term interest rates shown as the yellow line  and long-term interest rate premiums shown as the light green line, use the left hand axis. Best Guesses as to the future development of the variables are also shown on the left hand axis. The Best Guess for interest rates is the thin orange line. The Best Guess for long-term rates is the light green line.

Best Guesses show what would happen to the premiums based on forecasts for interest rates and inflation both at home and abroad. Depending on whether the investment perspective is Dollar-based or relative to a global benchmark, the relevant foreign forecasts are those for the United States or a GDP-weighted global average. Forecasts are based on consensus estimates.

Owing to the conversion of legacy currencies into Euros, analysis is provided on the common currency, rather than for individual countries. Historical data is provided by creating synthetic GDP-weighted time-series for the component currencies, expressed in the European Currency Unit.

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