Last week, in a somewhat surprise move, the Bank of Canada raised interest rates again, partly due to the unexpectedly strong economic reports we mentioned in our last newsletter. In response, the loonie strengthened to its
highest value against the U.S. dollar in two years
For those not familiar with why interest rates affect a country's currency, it's largely because of the flow of international funds. There are huge (as in, trillions of dollars) sums of money, be it from sovereign nations, companies, or investors, looking to invest in very safe investments like T-Bills.
When a country like Canada increases its interest rates, those looking to allocate these funds become more interested in Canadian interest-bearing investments (due to the higher ROI) in comparison to other places. For example, an American pension fund wanting to buy one billion dollars of Canadian T-Bills, will need to sell the U.S. currency they have and buy Canadian currency to make the investment. And via the magic of supply and demand, the Canadian dollar rises in value.
There are, of course, other factors affecting a nation's currency strength, but this is usually why you see a country's currency rise when they raise interest rates
----- especially when it's a surprise. Lowering interest rates, of course, will have the opposite effect.