Are negative rates the new trend?

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Interest rates are dropping below the zero line. Are negative rates the new trend? While investors worry about the future changes that lower interest rates will bring, the binary options industry is also expected to go through these drastic changes. These alterations have become a matter of interest for most traders. You’re wondering how? Let’s peep into the story.

A growing number of borrowers mainly in the financial markets are being perturbed by the actual situation given the emancipating proportion negatives rates are taking. However, interest rates decisions are not the next thing happening but will actually get a grip on the binary options world. You must certainly be asking yourselves why do interest rates matter so much? Charging local banks instead of normalizing interest rates, seems to be the best escape for central banks. Volatility generated by financial markets in regards to interest rates and other related economic events is a delight for most traders. Most of the traded assets in binary options are concerned with the ongoing situation.

What shall a Central Bank do when resources that need to be allocated to the economy becomes scarce and inflation remains low? Persisting weak economies have urged central banks of major economies, which provoked interest rates to lose almost all their value, touching the zero line. However, at a given moment bringing interest rates to its lowest did not seem to rescue the economy at all. Then a central bank does what the Bank of Japan recently did. Go negative.

Negative Interest Rate Policy

A negative interest rate policy (NIRP) is an unconventional monetary policy tool whereby nominal interest rates are set within a negative value, below the theoretical lower bound of zero percent. Central banks normally turn to negative rate policies in deflationary periods and depositors are actually charged to put their money into a saving account at their local bank, as opposed to receiving interest rates on their accounts.

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The zero lower bound phenomenon

Economists define the situation of impeding rates to go below the zero line as the “zero lower bound”. That is, interest rates should not fall below the “zero lower bound” level and should halt at a given limit if it is going down, but alternatively, this has become the new trend in the financial markets. If any such breach exists, then the breach has been violated, but I am not sure if the term “violated” is legit here. The reason is that, recent turmoil on the global markets show that the zero lower bound is not that rigid.

Negative rates, the new trending policy

Mitigating the financial recession had become the primary concern of most economies, pressurizing central banks to adopt immediate actions. No one wants to see any more financial bankruptcy, slowing employment and investors running away again. It was indeed a harsh time struggling to assemble dispersed puzzles of a battered global economy during recession and to prevent that, it seems that some central banks are ready to go to any length. Radical measures as such become important but many people are unaware of the reasons.

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Who were those who did it and why?

In guise to curb spending and face deflation, interest rates have been turned into negative rates, urging investors to pay the holding cost of their cash held by banks. In recent times, following recession period in 2008, many countries in the European Union began the new frenzy of adopting negative rates. The European Central Bank (ECB) has been a vivid example concerning the rates euphoria. In September 2014, ECB’s interest rate was -0.2 percent. Remember the zero-lower bound phenomenon? Well, according to ECB’s president Mario Draghi, the drop of -0.2 percent was the lower-bound of the bank’s interest rate policy. Though traders who trade the EURUSD in binary options were unhappy, the move did curb Euro’s gains against the mighty U.S. dollar. The ECB succeeded in bringing the Euro lower than the dollar.

Amidst European countries, Switzerland also followed the same pattern and experimented with lower-bound negative interest rates. Being a country reputed for an excellent banking system intertwined with a non-partisan foreign policy, Switzerland attracted investors who found this a secured spot for money-keeping. However, this eventually led to an overflowing economy, resulting into a strong currency and way too expensive exports. That’s when Switzerland decided to implement multiple series of negative interest rates to decelerate the inflow of foreign investment.

This is how negative rates are at the same time detrimental but necessary to bring an economy back on track. However, let’s peep into an interesting topic on how these interest rates manage to generate much volatility in binary options trading.

Interest rates and Binary Options

Why is there so much chaos on the trading market when interest rates data releases approach. The same thing occurred with the United-States in December 2015, when interest rates were increased. For weeks, the trend of the financial markets signaled high volatility ahead of the released of the data on December 16, 2015.

Investing

Image 3: U.S. Interest Rates December 16 The interest rates are a good medium to indicate whether an economy is functioning properly or not. After several years following the global recession, it was only last year that the Federal Reserve increased the rates from a previous reading of 0.25 percent to 0.50 percent. This was deemed as a colossal move by the Fed, but United-States needed to have very positive economic data in order to do so. The employment sector was doing well, the manufacturing sector coped also, the crude shale industry bloomed again while services sector also depicted good numbers. Retail sales were also relevant to create spark for an increase in interest rates. Ahead of this data, many investors and traders were hoping for a superb rise for the USD against major currencies in binary options. Most of the indices also edged up to create a superb rally, following the rates event.

What about negative rates effects

While interest rates are known to generate an array of binary options trading opportunities, negative rates are now the new trend. Japan adopted negative rates on February 16 this year and following this event, the Yen saw a reversal trend. Traders could not believe the reversal of the situation when the JPY surpassed the USD on the trading charts. The Japanese Yen was toned down in general and the share market was also jeopardized. However, the resistance of the Yen against the USD on the USDJPY chart was remarkable. Surely the weakness of the U.S. dollar did contribute to this event but traders relished gains.

The Bank of Japan’s action of a sudden introduction of negative rates was meant to trigger big market moves. Devaluating the Yen to support the economy and urging those who park their excess reserves in the BOJ to pay 0.1 percent rate, these were the main components of BOJ’s surprise decision. This was also done to prompt businesses and encourage savers to spend or invest. These are the few pros and cons of the negative rates in Japan.

However, for binary options traders, I will recommend them to always keep a track on:

Interest Rates decision
Mostly by:
The Bank of Japan (Japan)
The European Central Bank (ECB: Eurozone)
The Bank of England (BOE)
The Federal Reserve: (United-States)
And also look out for the speech by the president or governors of these central banks that always follow after the interest rate decision data release. These are important binary options trading indicators.

The Bottom line

Negative rates are a nice generator of rallies on the binary option financial markets, but overall my aim was to get you acquainted with how interest rates and negative rates function in their own way. Do not forget to monitor market trends when you need to trade and bear in mind that rates cycle may help you make worthwhile trades.

Warren Tancredi By: Warren Tancredi
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