Example
Suppose the canadian spot exchange rate is 1.18 Canadian dollars per U.S. dollar. U.S. inflation is expected to be 3% per year, and Canadian inflation is expected to be 2%
Do you expect the U.S. dollar to appreciate or depreciate relative to the Canadian dollar ?
Since inflation is higher in the U.S., we would expect the U.S. dollar to depreciate relative to the Canadian dollar.
What is the expected exchange rate in one year ?