Please I want to get a basic idea of what things drive interests rates up or down. The info below are the 8 things I had some concern around and if they get worse what would that do to inflation in Australia?:

(1) US subprime/US bank problems; (2) US trade deficiting; (3) US personal credit debt; (4) world food crisis; (5) high oil prices; (6) If the US situation gets worse I guess some countries may switch to using the Euro as there reserve. (7) Also with Iran Oil Borse wanting to trade in Euros this could open the gate for other countries to trade their oil and other commodities in currencies other than US $. (8) In Australia we just had 2 banks ANZ and NAB have big write downs.

Hey Mr Dad,

In terms of Economics and by theory, interest rates are tools that the central banks of countries (in Australia is called the RBA) use to control one primary variable which is inflation.

Definition of inflation by wikipedia.org is the increase in the quantity of money and money substitutes which causes the level of prices of goods and services to increase over time. Which simply means (by my own personal definition), the increase in the supply of money in all of it forms.
There are many forms of inflation but to list a few which i believe are the main ones are called 'Demand-Pull' and 'Supply-push'.

Demand-Pull, as the name states is an increase of demands (in economics, it is called agregate demand) within the economy therefore it push up the price (think of supply and demand).

Cost-Push is exactly the opposite, if there is an increase in the cost of supply, it will push the price up. (in economics, this is called agregate supply)

By economics theory, interest rates are used by central banks to slow down and put pressure on the inflation so the economy wont go out of control so to speak.
To get a clear understanding, you should get a picture of a "buisness cycle" or a "trade cycle", it illustrates when and how central banks will consider to lift up rates or to put it down.

As for Australia, really the main thing you should be watching for is the prices of commodities (the resource sector) and the financial sector just like the US.
Also, you should note that Australia doesnt trade that much directly with the US, however if the US were to hit flat on their face, i believe that it i will definitly have a 'knock-on' effect on to Australia.

Hope that helps,

Peter

ps. btw are u from australia?!? because i am !

Hi Mr. Dad,

Welcome to the community we are glad to have you.

In Module 8 our free video basics of trading course, the link to which you can find below, we have a section designed to give people a basic understanding of what moves interest rates.

InformedTrades : Learn Trading. Trading Education. | - Basics of Trading Course

As far as your questions, they are all very relavent, however unfortunately most of them do not have easy answers. I personally could write a book exploring the intricacies of each of these points, but I will do my best to give a quick view on each one, which I hope will generate a discussion that we can all learn more from.

While much of the subprime issue started in the United States it is a global issue because much of the debt has been spread around the globe and is held by institutions in various other countries such as Australia.

This hurts global economic growth and therefore makes it more likely that central banks from around the world including Australia lower interest rates to try and stimulate economic growth, all else being equal.

The US Trade deficit has to be funded which creates a demand for debt financing. For a variety of factors this has not happened up to this point, but over the long term this should make global interest rates higher, all else being equal.

Same goes here as the one above. More demand for credit should mean higher interest rates all else being equal.

There are a number of arguments as to what is causing the world food crisis, but one thing that I think everyone agrees on is that it is driving food prices higher. This increases inflation, but also hurts economic growth, as the fact that consumers are spending more on food means they have less to spend on other goods and services that drive economic growth.

At the heart of the debate here in my opinion is wether or not a central bank can affect the price of food through monetary policy, something that the demand elasticity (amount that people will reduce or increase consumption based on price) is very inelastic (people will continue to consume similar amounts even with higher prices and vice versa).

There is a global divide on this with the European Central Bank reacting to higher food and energy prices by raising interest rates, and the US Central Bank cutting or leaving rates unchanged due to the affects these factors have on economic growth.

Australia is unique in this sense, because as peter pointed out, so much of its global trade is related to commodities, so the central bank has in recent history reacted by raising interest rates as well. Now that commodity prices are starting to come down that trend could reverse however.

Same answer as above.

There is much debate on this point as well, and we have several videos which cover this topic which you can find at the links below:

Why the US Dollar is Still King of the Currency World

Will the US Dollar Remain King of the Currency World?

Videos above go into this.

Ultimately, how this will affect interest rates is how much spillover there is into the broader Australian economy as a result of problems at banks such as this. Currently it is looking like the economy is being affect more than expected, making interest rates more likely to come down in the future, all else being equal.

Hope that helps. Would be interested to hear any other view on this so feel free to post below as always with any questions or comments.

Best Regards,
Dave

__________________
Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Thank you Dave and Peter.

Yes, Pete, I'm in Aus too

From what you say, I guess the key thing for Australian interest rates at the moment is commodity prices, which have been settling down a little so could send interest rates down, so watching futures on coal, steel, aluminium etc would be relevant. Checking out the Aussie Banks it seems that a number like CBA have been more conservative with their subprime plays, but that we are starting to see some fall out, which I guess could play out over the next year, which could also push interest rates down.

Wow Dave, looked at some of your vids on youtube, you know a lot and it is refreshing to see a trade web site built on real knowledge of markets, economics, not just technicals. Most other sites tend to focus purely on technicals, or one aspect or formula, whilst ignoring things like the Fed making a major announcement 1 minute ago, which can throw the expectations of a tech based trade set up out the window.

I started my trading by learning about option trades, with set ups like double butterflies and getting to grips with concepts like IV crush. This was good stuff but not the best place to start. Also I was taught to use technicals more as a forecast than confirmation which was a little dangerous and error prone. I also read and subscribed to various posts that analysed and recommended certain stocks and trades, until one day I got my hands on a proper stock valuation analysis that was meant for fund managers. I then realised that all the writers I had subscried to had no references to this info and clearly had not done the homework. The information I had was not commonly available on this young stock and buy knowing it's true value I was able to trade options on it with much confidence, and with all the hype and volatility on the stock I did consistently well for the first time. It was then that I decided that if I really wanted to trade well I would need to learn some fundamentals about how to value a stock and get then get the right valuation information and software.

So here I am at square one, wanting to learn 'value investing', not to buy and hold but to trade with confidence so as not having to reverse option trade before assignment. It will take time but once I can learn to find undervalued stocks based on real knowledge and techniques, not market hype and then use my knowledge of how to use the various derivative leveraging tools I could do well. No wonder Warren Buffett has been known to keep selling puts each month on an undervalued stock until he gets assigned, and then be happy to be assigned as he just got a further discount, as he is confident that the stock will go up in price in the long term. This looks like one of the smart games to play.

Let me know if I am wrong on this Dave?

The market is starting to show more opportunities for value investors compared to last year.

Cheers
Mr Dad.

Hey Mr. Dad,

Thanks for the response and for sharing some of your background it is always interesting to see how others got started and what their line of thinking is. Also thank you for the kind words I am glad you are finding the site and my videos useful.

As for the Australian Economy, I think there are two key factors to consider. One is commodity prices, which as you and Peter have pointed out are a key driver of exports for the country and therefore have a large affect on the AUD. The second, and perhaps more importantly at this stage in my opinion however, it economic growth which is certainly affected by commodity prices, but also relies heavily on domestic demand.

Up to this point the Australian economy has held up relatively well in comparison to the rest of the world's major economies, but many feel this is changing now, which would make the Central Bank more likely to cut interest rates than to raise all else being equal. For more on the general factors affecting the Australian Dollar see the video below:

A Traders Introduction to the Australian Dollar

As far as whether a strategy which relies completely on technical analysis, completely on fundamental analysis, or a blend of the two is best, in my opinion this is completely dependent on a traders beliefs and personality. What I can say however is that the way that it looks like you are thinking about the market is in my opinion in line with how many other successful traders think, and it also seems like you are building more and more confidence in this method as you see it working over time. That would seem to me as the type of recipe that builds success.

Best Regards,
Dave

__________________
Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

yeh i'll agree with what david said about the domestic demand for australia,

Just yesterday, we had some big announcements of our trade balance surplus of 400mil and big drop in retail sales of 1% in june, you can say that one cancels the other but many ppl are starting to feel that it will be a time for a rate cut, so it'll be interesting to see what happens.

In my opinion, i was amazed how we can even get a trade surplus even when there are high interest rates (which will lead up to a stronger currency and by theory, exports should become less attractive) and high commodity prices. I guess it was offset by australia's unique location in the world with its vast resources and the growth of china n india.

By the way, the RBA of Australia meets next tuesday in whether to decide to cut rates or not.

best regards,
Peter