If you want to send money to India from Canada, you will get slightly different CAD/INR rates from every service provider. Some may even be hiding fees in those exchange rates. Knowing exactly how foreign exchange rates work will help you make the right decision when choosing a remittance platform to make overseas money transfers.

What is a foreign exchange rate?

An exchange rate is simply the value of one country’s currency versus the currency of another country. The two currencies in the pair are called the domestic and foreign currency, or the base and counter currency. Foreign exchange rate is often abbreviated to forex, or FX.

Pairings of currencies are written as USD/NGN, CAD/INR, GBP/GHS, and so on. The first currency is the domestic currency and always stands for 1 unit. The second is the foreign currency and describes the number of units you can get for 1 unit of the domestic currency. For example, if the USD/NGN exchange rate is 385, it means 1 US Dollar will get you 385 Nigerian Naira.

Who sets the foreign exchange rates?

Like most things related to prices, the market decides. All over the world, buyers and sellers trade on FX markets 24 hours a day. Traders on this market include international corporations, banks, hedge funds, central banks, retail forex brokers and retail investors looking to make a profit. While there is no centralised market like a stock exchange, the FX market is the largest market in the world by trading volume.

Floating rates are influenced by the demand and supply dynamics on the FX markets. The total of everyone buying CAD and everyone selling CAD creates that supply and demand. When demand for CAD increases, its value will appreciate against other currencies. And when the demand drops, CAD depreciates compared to other currencies.

Several technical and fundamental factors will determine what people perceive is a fair exchange rate and they might change their supply and demand accordingly. Sometimes when a currency becomes too high or too low, central banks and governments may step in to correct course.

But to make it slightly more complicated, there are different reasons why banks and corporations are interested in buying a specific currency. For example, Canada is a big oil exporter and the Canadian dollar is positively correlated to the price of oil. When the price of oil goes up, the price of CAD usually goes up as well. Australia is a large producer of gold, and the Australian dollar tends to move up and down together with the price of gold. Similarly, if the overall sentiment for a nation’s economy is positive, like say for the UK, then its currency (GBP) will also go up in value.

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