Brief review: We discussed how the difference in yields serves as an indicator of currency price movements.
As the bond spread or interest rate differential between the two economies widens, the currency of the country with the higher bond yield or interest rate appreciates than the currency of the other country.
Similar to bonds, fixed income securities are an investment that regularly pays a fixed return. Countries with high returns on fixed income securities will attract more investors, right?
This will make the currencies of these countries more attractive than those of countries with low fixed income market returns.
For example, let’s take a look at British bonds and European securities.
If the return of European securities is lower than that of British bonds, investors will be reluctant to invest money in the fixed-income market in the euro zone and will instead switch to assets with higher returns. Therefore, the euro is lower compared to other currencies, especially compared to the pound.
This phenomenon applies to any fixed income market and currency.
You can compare the returns of the Brazilian fixed-income securities and the Russian fixed-income market and use the differences between them to predict the behavior of the real (Brazilian currency) and the rupee (Russian currency).
Or you can compare the fixed income of Irish securities with those of South Korea…you will know what the situation is.
You can also find the yield on existing bonds through the government website of a country. Those data are more accurate. They are the government, trust them.
In fact, most countries issue bonds, but you may want to find information about countries whose currencies are the main currencies.
Some countries also offer bonds with different maturities, so make sure you compare bonds with the same maturity (such as 5-year British bonds and 5-year European securities), otherwise your analysis will be meaningless.