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 International Fisher Effect (IFE) – Quick Summary

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 International Fisher Effect (IFE) – Quick Summary

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The IFE suggests that:

Currencies with higher nominal interest rates will depreciate because the higher rates reflect higher expected inflation.

Thus, the difference in interest rates between two countries reflects the expected change in exchange rates.

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Case 1: Home inflation and interest rate are higher than foreign country

IFE Prediction: The domestic currency will depreciate.

Imports: More expensive, as domestic currency weakens.

Exports: More competitive abroad, as foreign buyers get more for their currency.

Example: Mexico (high interest/inflation) vs. U.S. (lower). The Mexican peso would depreciate relative to the dollar.

Implication: Trade balance may improve due to increased exports and reduced imports.

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IFE Prediction: The domestic currency will appreciate.

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IFE Prediction: The domestic currency will appreciate.

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Imports: Cheaper, as the domestic currency strengthens.

Exports: More expensive for foreign buyers, possibly reducing demand.

Example: Japan (low rates) vs. Brazil (high rates). The yen is expected to appreciate.

Implication: Trade deficit could widen due to rising imports and falling exports.

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Case 3: Home and foreign inflation and interest rate are similar

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Case 3: Home and foreign inflation and interest rate are similar

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IFE Prediction: No significant currency movement expected.

Imports/Exports: Relatively stable pricing and trade conditions.

Example: Canada and the U.S. with similar inflation and interest trends.

Implication: Exchange rate stability fosters predictable trade flows.

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The currency subsequently regained some of the ground it lost, but by late afternoon the USD:MXN exchange rate was back at 19.52.

That rate represents a depreciation of 4.5% for the peso compared to its closing position of 18.64 to the US dollar last Friday. The last time the peso was weaker was in late 2022.

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Article on how currency appreciation affects exports

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Article on how currency appreciation affects exports

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How exports react to exchange rate fluctuations, and what it means for low- and middle-income countries

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In low- and middle-income countries exports were often seen as only responding weakly and slowly to currency depreciations. And when their currencies appreciated, exports fell more and faster.

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USD to CAD Analytical Predictions in 2024, 2025 and Beyond

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USD to CAD Analytical Predictions in 2024, 2025 and Beyond

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From economic outlooks to key market drivers, this article provides valuable insights for traders navigating the complexities of currency trading.