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Overnight rate

Updated on July 18, 2023

The overnight rate, also known as the overnight interest rate or the overnight lending rate, is the interest rate at which banks and financial institutions lend and borrow funds from each other on an overnight basis in the currency market. In simple words, the overnight rate is the interest rate that banks charge each other for short-term loans that are borrowed and repaid within a day (overnight). It is a key benchmark rate that influences the cost of borrowing for financial institutions, which in turn can impact interest rates for various financial products, including loans, mortgages, and savings accounts.

Why is the overnight rate important in currency trading?

The overnight rate is a key tool used by central banks to implement monetary policy, influencing borrowing costs and economic stability.

Interest rate differentials impacted by the overnight rate can affect currency exchange rates, attracting or repelling capital flows.

The overnight rate plays a role in carry trades, where traders borrow low-interest-rate currencies to invest in higher-yielding ones, generating profits.

Changes in the overnight rate reflect market sentiment and risk appetite, influencing currency valuations.

The overnight rate affects market liquidity and short-term funding, impacting currency market stability and trading conditions.

Traders incorporate the overnight rate into their strategies and risk management, analyzing central bank decisions and expectations to anticipate currency movements.

Changes in the overnight rate serve as economic indicators, providing insights into a country’s economic conditions and policy outlook for traders.