In order to understand the reasons behind the fluctuations in foreign exchange rates, it is important to have a basic understanding of the economic concept of supply and demand and its connection to pricing.
Typically, the cost of a commodity, product, or service is established by the extent to which others want to acquire it. The economic principle of supply and demand asserts that when demand for a particular commodity, product, or service rises, its supply diminishes, causing prices to escalate. Conversely, when supply increases, prices tend to decrease.
Explaining Currency Fluctuations
The process of purchasing and selling foreign currency operates on similar principles, but it is somewhat more complex.
The particular foreign currency values are influenced by various factors beyond demand. Some of the factors that can impact a country’s currency in relation to another include the monetary policy (the money supply and interest rates) of the country, the inflation rates of the domestic currency, the existing political and economic conditions of both the country and the global system it operates within, and other key economic indicators, such as the amount of debt the country has, and the account deficits between nations.
The values of different national currencies in relation to each other, also known as the foreign exchange rate, are subject to change as per the principles of supply and demand. These principles, in turn, are influenced by the aforementioned factors.
An appreciation in the value of a currency can be attributed to either a surge in demand, a shortage in supply, or a combination of both. Conversely, a decline in the value of a domestic currency is the outcome of the converse scenario, involving either a diminished demand, a surplus in supply, or a blend of both.
Why Does the Exchange Rate Matter?
The economies of all nations are significantly impacted by the exchange rates and the associated values of national currencies.
In the event that a national currency exhibits a high value in the foreign exchange market, the corresponding country stands to gain advantages while importing goods. This is due to the increased worth of each unit of their currency in the market, which translates to better value for purchases. Likewise, businesses that operate using that particular national currency also stand to gain from such a situation.
Conversely, a nation with a strong currency may face challenges in the exports sector as foreign buyers, including nations and businesses, may opt to avoid purchasing from them due to their relatively higher prices. This is because the increased cost in the buyer’s own currency makes the transaction less appealing.
National economic policymakers aim to maximize prosperity for their citizens, which requires them to stimulate their economies and manage their currency’s value. To achieve their goals, they weigh the advantages and disadvantages of higher and lower currency valuations, with the aim of creating a balance that promotes economic growth.
How are the Health of Businesses and National Economies Impacted by Foreign Currency Fluctuations?
Foreign customers seeking to purchase a business’s goods or services will always look to maximize the value of their foreign currency, with decisions about whether or not to make a purchase often coming down to if the deal is favourable from a currency exchange perspective.
For example, a small US retailer looking to buy 200 baseball caps and beanies is better off buying the pieces in Canada rather than in the United States seeing as the US Dollar is stronger than the Canadian Dollar (0.74 USD to 1 CAD at time of writing).
As a business it is important to keep in mind that when the foreign currencies used to purchase goods in your country are relatively weak, your products may become prohibitively expensive for international buyers. As a result, they will try to find better value elsewhere.
Alternatively, when a foreign currency’s value is higher than that of your country’s currency, the purchasing power of foreign buyers increases relative to domestic buyers. This can generate more interest in your products, leading to increased sales and economic growth in your country.
Navigating the volatile waters of flexible exchange rates can be challenging for businesses as they respond to numerous factors. If a currency required for conducting business experiences significant fluctuations, it can negatively impact profitability. This economic instability is detrimental to businesses and motivates central banks to balance the various factors that contribute to currency exchange rates.
How Can My Business Lower Expenses Through Currency Fluctuations?
Any organization that engages in international transactions, whether as a seller or a buyer of commodities, products, or services, must develop a strategy to make the most of exchange rate fluctuations.
Fortunately, companies like CanAm Currency Exchange, who have a wealth of foreign currency exchange experience both with individuals and businesses can be a huge asset. They can provide everything from a foreign investment hedging strategy advising to forwards contracts and swaps so that your business can diminish its foreign exchange risk and get a bigger bang for its buck.
Foreign currency exchange rates, if they are not adequately monitored and strategized for, can have severe impacts on how your business does from a financial perspective. An ineffective approach to buying and selling foreign goods and services can diminish your business capital, put the financial health of your business at risk, and as a result put your employees in a precarious financial position.
CanAm Offers Access to the Best Rates on the Market
CanAm Currency Exchange’s business services in Windsor and throughout the rest of Canada can help business owners looking to successfully navigate the foreign currency market and use exchange rates to their advantage.
By providing access to the best rates on the market, a host of other business-specific services, and easy fund conversions and transfers, CanAm has established itself as one of the leading currency exchange companies in Canada, helping businesses and individuals alike make the most of their money.