Rate of return is equal to interest rate plus appreciation, is that right? If so, say you have a deposit in Canada and you find that the expected rate of return is greater in Australia. The demand for Australian currency increases, and the exchange rate (Canadian dollars per Australian dollar) increases. According to exchange rate parity, this exchange rate should increase until the rates of return in Canada and Australia are equal. But won't the increasing exchange rate just increase the rate of return in Australia which was already higher?


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