For simplicity, I will explain everything using the graph above.
In this case, The demand function is determined by the Japanese, who wants Canadian dollars in order to purchase Canadian goods, services, or assets.
The supply function is determined by Canadians, who want to exchange their currency for yen in order to purchase Japanese goods, services, or assets.
Things that increase the demand (the opposite decreases the demand) :
- If Japanese people become richer, they will buy more imported goods, thus increasing demand for CAD.
- If the interested rate of CAD rises, Japanese people will want to hold CAD as a financial asset
- If inflation is higher in Japan than in Canada, Japanese people will want more imported goods because they become relatively cheaper
- Speculation of a rise in CAD exchange rate.
Things that increase the supply (the opposite decreases the supply) :
- Canadian investments in Japan
- If Canadians become richer, they will buy more imported goods
- Inflation in Canada
