Exchange rate determination is one of the most important topics in International Finance. This report will give you a chance to apply theories on exchange rate determination covered in class to understanding the Canadian exchange rate determination. 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.
You are asked to forecast the average level of the Canadian exchange rate against US dollars in 2018. 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 2018. A specific number is not necessary. But you must indicate if it will appreciate, depreciate or remain the same compared to the exchange rate level when the report is written.
Second, justify your forecast based on the exchange rate determination 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, current account balances in both Canada and US. Besides, oil prices are also extremely important due to the great influence of oil production on Canada’s GDP and trade balance.