Foreign Exchange Rates
A guide to understanding exchange rates when selecting an international money transfer service.
Exchange rates can be a bit tricky to grab hold of, especially if you’re not an economist, but we’ll try to break them down into simple terms. When we talk about exchange rates, we’re referring to the amount of one currency that has to be given up in order to acquire another currency.
When you boil it down, an exchange rate is the price of a nation’s currency in terms of another currency, with most exchange rates quoted in value against a major currency, like the euro (EUR) or US dollar (USD). For example, an exchange rate of CAD$1 = USD$0.81 means that if you exchange CAD$1,000 you will get USD$810.00 in return.
Get the latest foreign exchange rates with our transfer calculator
Enter in the amount you want to transfer overseas and select your preferred currency, and our handy transfer calculator will tell you approximately how much you’ll receive after conversion using real-time interbank rates.
Interbank rate and fluctuating exchange rates
The interbank exchange rate (also known as the mid-market or spot exchange) is the rate at which banks swap currencies between one another. Banks will typically do this directly or through electronic brokering platforms. As a customer, you will typically not have access to the mid-market rate because the banks “re-sell” exchange rates at a marked-up cost to customers in order to turn a profit.
When it comes to the global market, exchange rates are governed by a complex system of supply and demand. Put simply, rates float freely against one another and fluctuate in accordance with one another. Currency valuations are determined by the stream of currency as it flows in and out of a country. A high demand for a particular currency usually means that the value of that currency will increase, while a low demand will achieve the reverse.
Factors that influence exchange rates by country
For many of us, the technical reasons why exchange rates fluctuate aren’t essential to tracking the market, but it can be useful to have an understanding of why exchange rates are sometimes unpredictable.
- Inflation rates. When inflation rates are low, a country will typically have higher-valued currency, while the reverse is true for high inflation.
- Interest rates. Higher interest rates are often more attractive to foreign investors, which subsequently increases the demand for and value of a currency, while low interest rates deter investors and cause demand to fall.
- Current account deficits. When a country spends more on imports than it earns on exports, it will need to borrow money from other countries to finance its deficit which can cause the value of its currency to decline.
- Level of public debt. Large budget deficits often result in higher inflation which in turn lowers currency valuation.
- Stability and economic growth. The level of political stability and economic growth in a country influences foreign investment, which can cause currency valuations to fluctuate.
Types of exchange rates
There are two ways the price of a currency can be determined against another currency.
- Fixed exchange rate. A fixed exchange rate, sometimes called a pegged exchange rate, is when a currency is fixed against either the value of another single currency or to another measure of value, such as gold. A set price will be determined against a major world currency like the US dollar or the euro. Developing economies often use fixed rate systems to stabilize their currencies and limit speculation from foreign investors.
- Floating exchange rate. A floating exchange rate is set by the forex market based on supply and demand compared with other currencies.
Banks vs money transfer companies or services
As mentioned above, while banks do offer international money transfers, they are also known for upselling exchange rates to clients, while simultaneously tacking on high administrative fees. When it comes to transferring funds overseas, many Canadians opt to use online transfer services instead of the bank, since these companies trade in large volumes of currency every day and are better-positioned to offer competitive exchange rates with lower fees. Banks resell currency exchange to clients and add a large markup (between 2.5 – 4%) while non-bank services offer clients lower exchange rates (typically less than 2.5% margin).
International money transfer comparison for banks
The table below compares exchange rates and transfer costs for Canada’s five largest banks: Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CIBC), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO) and Royal Bank of Canada (RBC).
|Bank||Transfer Fee (CAD)||Exchange Rate Markup|
|Toronto-Dominion Bank (TD)||$9 – $30||2.64%|
|Canadian Imperial Bank of Commerce (CIBC)||Fee-free||3.34%|
|Bank of Nova Scotia (Scotiabank)||$9 plus 1% of principal||2.88%|
|Bank of Montreal (BMO)||$15+||2.65%|
|Royal Bank of Canada (RBC)||$13.50||2.60%|
International money transfer comparison for non-banks
The table below compares exchange rates and transfer costs for five of the major international money transfer services in Canada.
|Money Transfer Service||Transfer Fee (CAD)||Exchange Rate Markup|
|TransferWise||1% of principal||Less than 1%|
|Canadian Forex||$15||Less than 2.5%|
|TorFX||Fee-free||Less than 2.5%|
|Currency Solutions||Fee-free||Less than 1%|
|World First||$10||Less than 2.5%|
Why choose international money transfer services?
As outlined above, many banks offer international wire and money transfers, but these are often bogged down by hidden fees, large commissions or heavily marked up exchange rates. International money transfer services, on the other hand, make money by applying a small margin to the exchange rate and lowering transfer fees to compensate. It’s important, before transferring money overseas, to compare your options to ensure that you get the most out of every transaction.
Where can I find the best exchange rates?
If you’re planning to travel to a foreign country, you can use the following tips and tricks to save money on exchange rates.
- Use your credit or debit cards rather than currency exchange kiosks. Using an ATM to withdraw money in the local currency is often cheaper than exchanging money at local kiosks, which often tack on fees and surcharges in order to ensure a margin of profit.
- Use non-bank exchange services: If you need to send money overseas, international money transfer services offer more competitive exchange rates and lower margins than major Canadian banks.
- Convert cash when rates are favourable: Monitor rates and exchange currencies when rates are favourable. If you exchange money with a reputable agent with competitive rates, you will save money and the headache that comes along with attempting to convert money at local kiosks.
- Use a travel money card: A travel money card allows you to lock in an exchange rate when you load money onto your card, meaning you can set your rate in advance and avoid the unpredictable fluctuations of the marketplace.
- Comparison of travel money cards
- Guide to international money transfers
- Read our analysis of the Torfx Foreign Currency Exchange
- Compare a range of travel money options
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