The Canadian forex market attracts buyers and sellers from various parts of the globe. The currency exchange rate is an essential factor that determines the economic level of a country. This is the main reason why the exchange rates are the most analyzed, watched, and government manipulated economic measures.
The exports of a country will be less expensive and its imports more expensive if its currency has a low value. The exchange rates are determined by complex factors, but experienced traders have a better understanding of how these rates and currency values can affect their returns on their investments.
Rates of Inflation
Inflation is one of the factors that lead to the deprecation of a country’s currency. Countries with high levels of inflation have low purchasing powers because their currencies have a low value. Some countries like Switzerland, the USA, Japan, and Germany have lower rates of inflation as compared to the developing nations.
Interest Rates
Inflation, exchange rates, and interest rates are all correlated. Central banks can exert its influence over exchange rates, and changing interest rates, and inflation by manipulating the interest rates. This is an issue that can affect the currency value and rates of inflation. High interest rates can attract foreign capital and thus lead to a rise in the exchange rate.
Strong Economic Influence
Most investors love working with stable and developed countries since they have a strong economic performance. Such countries draw investments from other nations that have a high economic risk. Political instability and turmoil are some of the issues that make investors lose confidence in countries with poor attributes.
Public Debt
Most nations borrow money to finance their major projects and meet their budget deficits. Every country should set funds for projects that can stimulate its domestic economy. Many investors find nations with large debts and public deficit to be less attractive as compared to those that are not indebted. Having large debts is an issue that can encourage inflation. In general, the debt rating of a country can significantly determine the exchange rates of its currency.
Terms of Trade
The terms of trade refer to the ratio that compares the import prices and export prices of a country. The country’s terms of trade can significantly improve if the value or price of its exports is higher than that of its imports. In increase in terms of trade leads to a rise in revenues and an increase in demand for the nation’s currency.
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