Tuesday, November 10, 2009

Exchange Rate Forecast


Barring extraordinary intervention by the Bank of Canada, I expect the loonie to continue a trajectory towards parity, with a strong possibility of eclipsing that mark in early 2010. The graph above sets out my baseline forecast for the quarterly average US/CAD exchange rate from Q4 09 – Q4 10. The forecast is presented with 50%, 70% and 90% confidence intervals to factor the daily volatility of exchange rates and uncertainty underlying the forecast. The confidence intervals were constructed using spreadsheets from the authors of this (recommended) paper.

5 comments:

Kosta said...

Thanks for the chart, and the link. Useful technique, those fans.

I think there might be an error in your fans though. Typically they widen with time but your fans are of constant width after the first year. Or perhaps I am confused.

Shock Minus Control said...

Hi Kosta - you are right about the fans usually widening with time, however the spreadsheets the authors provide allow you to adjust the skewness and variance based on either risk factors or personal judgment. I've therefore adjusted the CIs to provide what I feel are more reasonable bounds for the forecast.

Shock Minus Control said...

I should also say - the CI's are wide in the near term because the loonie has been so volatile lately and I wanted to reflect that uncertainty in the CIs.

Kosta said...

Thanks for the reply, and I understand your logic. Essentially you're assuming that CAD variability will decrease with time. That's a likely outcome if there is a sustained global recovery. Hard to imagine a repeat of the variability in the the last two years

Highest CD Rates said...

Thank you so much for sharing this paper here via link in the post. I agree with the theory and it is good that is based on the survey and market based data.