What Should Investors Mind in a Wave of Interest Rate Cut

US and European Union start a new wave of interest rate cut

Central banks around the world are stepping up their quantitative easing efforts to stimulate an economic recovery. On September 12th, European Central Bank (ECB) announced after decision meeting to further cut the deposit reserve rate from -0.4% to -0.5%, while restarting the quantitative easing scheme from November with a plan to purchase €20 billion-worth of bonds each month. On September 19th, US Federal Reserve will also release its decision on interest rate, which is expected to be down by 25 basis points in September.

Emerging economies in Asia may be next

Since the beginning of this year, the manufacturing in Asian countries and regions have experienced low tides due to trade war and other financial incidents. With the Purchasing Managers' Index (PMI) dropping below the 50 mark, many emerging market economies in Asia are joining the US and EU in cutting interest rates. This week has seen slight fluctuations in Asian currencies, with dips in the prices of PHP, INR and MYR against USD. Over 10 Asian economies including the Philippines, India, Malaysia, Thailand and Indonesia may try to boost domestic economy through further interest rate cut. According to a survey of Reuters, Bank Negara Malaysia may keep its benchmark interest rate unchanged on Thursday to save room for further interest rate drop to counteract domestic economic slowdown and uncertainties in global trade.

Risks that forex investors should beware of

Advanced economies like European countries may benefit from currency depreciation as it creates economic stimulus through inflation and more competitive exportation. However, devaluation of currency may lead to excessive deflation which will further harm the already vulnerable economy in developing countries. The latest wave of interest rate drop has driven prices of currencies to their lowest point in many years, which not only causes investors heavy losses but also shakes the global market.

Forex market is full of uncertainties, which require investors be more risk-conscious and follow the latest market trends, particularly the macroeconomic policies, including fiscal and monetary policies, of central banks, as they have direct implications on forex rates. In addition, key economic indicators as well as investors‘ hedging sentiments will also affect the rate of currencies. If you’d like to learn more about forex market trends and investment tips, you can download the WikiFX App to check out the forex information we constantly update for investors.