Chain Description Currency Fluctuations Starting From Rising Prices of Goods

The Canadian dollar (CAD) rose after Canadian inflation data was released at 9.30 last night. CAD soared with the USD / CAD pair falling to almost 100 pips. CAD is also seen to soar against other major currencies.

All inflation readings jumped with the monthly consumer price (CPI) rising 0.7% against expectations of 0.4% and much higher than the previous reading which recorded a decline of 0.4%.

With a monthly reading increase of 0.7%, of course, it boosts the CAD currency because with the rising inflation reading it actually also increases the potential interest rate increase of the central bank of Canada.

Why does the currency rise when inflation rises?

Indeed that is the rule in forex trading, where inflation is an important thing that traders need to take into account. It is as simple as this, inflation we know is ‘rising commodity prices’ and if rising commodity prices fail to be well controlled it will cause society to be burdened with increasingly expensive commodity prices.

So why did the currency go up?


Rising commodity prices (inflation) had required the central bank to re-stabilize prices by 'raising interest rates'. Now you must be wondering, why raised interest rates can control inflation? Ok, when the central bank raises interest rates it actually makes the cost of borrowing money from the bank expensive making people find it difficult to get a loan and in turn reduce their expenses. It is actually ‘supply and demand’ in the economy, as simple as that.

So why is the increase in interest rates increasing the value of the currency?

Rising interest rates actually have a positive impact on large investors, especially in the bond market. Because the return on investment of these investors is based on the value of interest rate (interest rate). If the interest rate is high, it will attract more investors from abroad to invest. The same rule is also ‘supply and demand’ in the economy when they want to invest in country A, they have to buy the currency of country A first to invest causing the demand for country currency A to increase and then the value of the currency becomes high. Yes, it's that easy.

It is actually the reasons that range from rising inflation to rising interest rates by the central bank and then directly the value of the currency also increase.