Forecasting Exchange Rates using Leading Economic Indicators

The Canadian Dollar leads the way in the recent volatility of foreign exchange markets and much speculation into why this holds has followed. Fluctuations in oil/commodity prices have been considered, yet do not fully explain the volatility. This paper considers various economic indicators, selects the most impactful, and finalizes a model. The variables with the most impact come down to unemployment rate, oil price, consumer confidence index and wheat prices. Ultimately, through in-and out-of-sample forecasting, we find that the model is not fully able to accurately forecast short term fluctuations yet does well in expressing longer term forecasts.