Interest Rates And Currency

Last time, we examined how the amounts of currency and foreign exchange reserves drove currency prices.  There are more forces at work here.

A country’s prime interest rate is one of them.

Below we examine the linked effect of interest rates and currency value from July 12, 2019.  The rates in the study vary widely and are part of what supports the price of money.

At left, we see how the world reacts to the Volume of money, the foreign exchange reserves, and the prime rate, here set to 2% (Sweden’s at that time).  If we change that loan figure to 63% (which Brazil had then), we get the picture at right.  Note the Value response plane is lower.

While the statistics for this analysis are significant (P-Values of 3.30E-12 for the equation, 4.96% for Prime, 3.06E-12 for Volume, 0.01% for Foreign Exchange Reserves), the Mean Absolute Percentage Error (MAPE) is high, at 117.5%, meaning there is more work needed to decompose this market.

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