Prospective Capital Flows and Currency Movements: Euro Versus Canadian Dollar

Abstract

Fully updated in early 2017, this case asks students to assess the likely movement of the euro against the Canadian dollar. Students must sort through mounds of evidence on FX markets, prospective monetary policies, commodity prices, and past and prospective international capital flows. Suitable for both core and elective MBA courses in global financial markets and international finance, this case explores factors pointing to further euro appreciation and to others favoring the Canadian dollar. Excerpt UVA-GEM-0124 Rev. Mar. 8, 2017 Prospective Capital Flows and Currency Movements: Euro versus Canadian Dollar As Luke Anthony was riding the early-morning Metro-North train from Grand Central Station to Greenwich, Connecticut, in March 2017, the euro and North American currencies dominated his thoughts. Policy divergence, especially for monetary policy, was the theme. On one side was the U.S. Federal Reserve (Fed), which had stopped its quantitative easing (QE) policies and started to tighten (for the first time in a decade!). On the other side was almost every other G10 (Group of 10) country fighting for weaker currencies as the only remaining means of stimulus. Striking were a policy moves by the European Central Bank (ECB), which after years of being told by the Germans that QE was illegal, were doing just that. In a world of policy divergence, currencies will be volatile. The dominant theme on Anthony's mind and those of his peers was that strong and maturing U.S. growth could lead to a higher U.S. yield curve that should be supportive of the U.S. dollar. The bullish view on the U.S. dollar had become a consensus view, but Anthony wondered if there were opportunities to invest in other currencies that might also benefit from this theme. . . .