Throughout the Capital Market Expectations reading higher interest rates typically imply appreciate of currency. However, the Uncovered Interest Rate Parity relationship and Carry Trade is based on the currency with the higher interest rate depreciating.
I am clearly missing something here…
Anyone? Bueller?
Both can occur… If rates are attractive, it could produce foreign investors to purchase the currency and invest, which increases currency in short-term. However, long term parity implies higher rates result in lower currency. Feel free to add to this if I am overlooking something.
Within a minute after posting I saw on UCIRP: “on longer term averages…” As you mentioned I found a few instances within the readings that point to short term appreciation or depreciation.
Thanks.
Also depends on the interest rates you’re talking about. Currency with higher inflation rate will depreciate, but higher real rate will appreciate. It’s why nominal rates can be tricky.