If the interest rate on a 12-month deposit in a U.S. bank is 5 percent and the interest rate on a comparable 12-month deposit in a Canadian bank is 8 percent, we would expect that:

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The expectation of higher interest rates in Canada compared to the U.S. suggests that more investors would prefer to hold Canadian deposits to benefit from the higher returns. This increased demand for Canadian dollars to make these investments would likely lead to the appreciation of the Canadian dollar relative to the U.S. dollar. Conversely, the U.S. dollar would depreciate against the Canadian dollar as investors move their funds to Canada to take advantage of the higher interest rates.

If the Interest Rate on a 12-Month Deposit in a U.S