Why are there positive and negative overnighted interest rates for foreign exchange ?

2023-05-26
Summary:

In the foreign exchange market , buying and selling are currency pairs , and there are no issues with storage and preservation of goods . The calculation method and amount to overnight interest are determined by the foreign exchange trading platform or broker you choose .

In the foreign exchange market, buying and selling are currency pairs, and there are no issues with storage and preservation of goods. Therefore, the inventory fee in the foreign exchange market actually refers to the cost of foreign exchange holdings, which is overnight interest. Overnight interest is the interest paid or earned by holding a position overnight. Each currency has its own interest rate.

Is it normal for investors to notice positive and negative overnight interest rates?


It is normal for overnight interest rates to be positive or negative, as this is due to the different interest rates of different currencies in the foreign exchange market. When conducting foreign exchange transactions, if you hold a high interest rate currency pair (such as AUD/JPY), you can receive overnighted interest income; If you hold a low interest rate currency pair (such as euros/dollars), you will need to pay overnight interest fees.


For example, if you hold a long position in AUD/JPY with current overnight interest rates of 0.5% and -0.1%, you may receive an overnight interest income of approximately $3.3 per day (calculation formula: 100000 * 3.5%/365=9.59), or you may need to pay an overnight interest expense of approximately $1.6 per day (calculation formula: 100000 * -0.1%/365=-0.27).


Therefore, it is a normal phenomenon in the foreign exchange market to have positive and negative overnight interest rates, which reflects the differences in interest rates between different national currencies. Traders need to choose a suitable currency pair and holding time based on their trading strategy and risk tolerance, in order to maximize returns or reduce costs.

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