The title of this blog can be misinterpreted as representing a post that talks about "tips and tricks" to meet new people at public places or events that will hopefully lead up to getting one's (or many ones) phone number at the end of the night. Well the only number I'm typically looking up after a night out is the time, so I wouldn't be the best source of advice when it comes to hitting it off with strangers.
Nonetheless, the exchange of numbers this post is referring to is the exchange rates of money! We all have seen on TV or witnessed at our local banks the different exchange rates offered for different currencies around the world and how these rates fluctuate daily. So what makes these rates change?
The Bank of Canada (or any central bank) is responsible for three primary tasks:
1) Regulate interest rates
2) Control inflation (done by regulating interest rates)
3) Control exchange rates (although no central bank will admit to this)
Controlling exchange rates may be a hidden agenda, but the premise is based on simple economic laws of supply and demand. The law states that when price of a good falls, the demand for it rises and vice versa. On the other hand, when prices of a good starts to rise, producers want to produce more of that same good, so supply is driven upwards (and vice versa with decreasing price and decreasing supply). The point at which the demand curve and the supply curve meet is referred to as the "equilibrium point". This methodology can also be applied to currency.
Currency exchange rates show the value of one currency against another currency. The value of a domestic currency, say the Canadian dollar, can be used as a baseline against the value of a foreign currency, say the American dollar. The ratio between the two currency values is essentially the price to buy the foreign currency in your own domestic dollars.
There are three main factors that affect the value of one currency against another:
1) Purchasing Power Parity or "Law of One Price"
What this means is that if the price of good "A" in domestic dollars is greater than the price of good "A" in foreign dollars, at the current exchange rate, then the foreign currency will appreciate. This means that if the price of, say cigars, are cheaper to buy in the US than in Canada given the current exchange rate, then people will most likely go out of their way to buy cigars from the US. In doing so, consumers from Canada must buy US dollars to buy these cigars from the US. This will appreciate the foreign currency, or US currency in this example.
2) Flow of Trade
What this refers to is if the difference between exports and imports of a domestic country is greater than zero and growing, with all else equal, the domestic currency should appreciate. For example, if Canada is exporting more crude oil to the US than it is importing (and this gap between exports and imports is growing), the US will be buying more oil from Canada than Canada is buying from the US. That extra bit of exports over imports for Canada will see the US having to buy more Canadian currency in order to buy the oil from Canada compared to the amount of US dollars the Canada is buying to import US oil. Just like in number 1, this added purchase of Canadian dollars will appreciate the domestic currency.
3) Interest Rates
If the real short term interest rate (rate calculated by removing effects of inflation) of a domestic country are greater than the real short term interest rates of a foreign country, then the domestic currency appreciates. For example, if Canada's interest rate is higher than the US interest rate, US investors are likely to be pouring money into Canadian bonds, notes, and other marketable securities since Canada offers higher rate of returns on its investments. Again, this will lead to an increase in the purchase of Canadian currency, resulting in the domestic currency to appreciate.
However, higher long term interest rates may turn off some foreign investors. A central bank will increase interest rates to lower the effects of inflation (or lower the inflation rate). Therefore, if long term interest rates are higher domestically, say in Canada, than in foreign markets, say the US, then the US may have future expectations of heightened inflation in Canada. This may lead to US investors shying away from buying any Canadian long term bonds or other investments. People simply don't want to invest in high inflation countries! Does Zimbabwe ring a bell?
The next time you find yourself exchanging Canadian dollars for US dollars for your Disneyland trip, don't ream out the desk clerk for giving you 70 cents on the dollar and ripping you off. And please don't ask the individual at the currency exchange kiosk to exchange "numbers" with you.