Guide

Why currencies move: interest rates, commodities, economic announcements

The price of a currency pair changes constantly, from Monday morning to Friday evening. Behind these moves are a few major forces, always the same ones. This guide explains them in plain words, with the example of three currencies: the Australian dollar (AUD), the New Zealand dollar (NZD) and the Canadian dollar (CAD). It does not say which way they will move: nobody knows that in advance.

A pair is a balance of power

A pair such as AUDCAD shows how many Canadian dollars one Australian dollar is worth. It rises if the AUD strengthens or the CAD weakens, and falls in the opposite case. What matters is therefore not the health of one economy on its own, but the comparison between the two.

Interest rates

This is the main force. Each currency depends on a central bank: the Reserve Bank of Australia for the AUD, the Reserve Bank of New Zealand for the NZD, the Bank of Canada for the CAD.

When a central bank raises its rates, or hints that it will, holding money in its currency pays more, and the currency tends to strengthen. When it cuts them, the opposite happens. Markets often react before the decision itself, as soon as they expect it.

Rates also explain the swap, the small amount paid or received each night on an open position.

Commodities

Australia, New Zealand and Canada export a lot of commodities. Their currencies therefore partly follow commodity prices:

AUD: iron ore, coal, and demand from China, Australia's largest customer.
NZD: dairy and agricultural products.
CAD: oil, of which Canada is a major exporter.

When the oil price rises sharply, the CAD tends to strengthen; when iron ore falls, the AUD tends to weaken. These links are not automatic, but they weigh over the long term.

Economic announcements

Some figures are published on fixed dates and can move a currency within minutes:

rate decisions by central banks;
inflation (consumer prices);
employment (unemployment rate, jobs created);
growth (GDP) and business activity.

What moves the price is not the figure itself, but the gap with what the market expected. A “good” figure that is worse than forecast can make the currency fall. These announcements are listed in advance in an economic calendar.

Market mood

When markets are worried (crisis, war, stock market crash), investors retreat to currencies seen as safe, such as the US dollar, the yen or the Swiss franc. Commodity-linked currencies, such as the AUD, the NZD and the CAD, then tend to fall. When confidence returns, the opposite often happens.

Key points

A pair measures a balance of power between two economies.
Interest rates are the main force; commodities and market mood matter too.
Economic announcements cause sudden moves, especially when the figure surprises.
Nobody can predict these moves with certainty.

And at PlanetFinance?

The strategy trades AUDCAD and NZDCAD: three economies that export commodities, which partly explains why these pairs long moved within a range (see why these two pairs). A central bank decision or a commodity shock can nevertheless set off a long trend, the main risk for a grid. The strategy is adapted to market conditions.

To follow the announcements that concern these currencies, the economic calendar for the week is published every Sunday evening in the PlanetFinance Telegram groups. It informs; it gives no signals.