Posted: November 29th, 2015

Forecast report on the Canadian exchange rate against US dollars in 2016

Instructions on aforecast report on the Canadian exchange rate against US dollars in 2016

Exchange rate determination is one of the most important topics in International Finance. This report asks you to apply the theories on exchange rate determination covered in class to understanding how the Canadian exchange rate is determined. The most important thing I am looking for in this report is that your report indicates that you understand course materials and know how to apply them to the exchange rate determination in the real world. As long as you show this in your report, I will deem your report satisfactory.

You will be asked to forecast the average level of the Canadian exchange rate against US dollars in 2016. Your forecast must be based on exchange rate determination theories covered in class. In your report, you should include but not necessarily be limited to the following steps:

First, state explicitly your forecast about the average level of the Canadian exchange rate against US dollars in 2016. A specific number is not necessary. But you must indicate if it will appreciate, depreciate or remain the same compared to the current exchange rate level when the report is written.

Second, justify your forecast based on the theories covered in class. You will find that according to the theories, the Canadian exchange rate against US dollars depends crucially on several macroeconomic variables such as interest rates, inflation rates, and current account balances in both Canada and US.

Thus your justification should include but not necessarily be limited to the following steps:

First, choose the key Canadian and US macroeconomic variables that will affect the Canadian exchange rate against US dollars and explain why. (You will need to use the theories on exchange rate determination covered in class to justify your choices.)

Second, you need to forecast the changes in these Canadian and US macroeconomic variables in the future.

Third, connect the changes in these variables to the changes in the exchange rateand forecast the average Canadian exchange rate against US dollars in 2016.

What you are required to do in this report is essentially an exchange rate forecast exercise based on the fundamental analysis. There exist many alternative methodologies for exchange rate forecasts such as the technical analysis. The fundamental analysis must be included in this report. You are welcome to add alternative analyses to complement your report.