Assume Australia has a nominal interest rate of 2.5% and an expected annual inflation rate of 1.3%. China has a nominal interest rate of 4.5% and an expected annual inflation rate of 2.6%. Given International Fisher Relation, which currency should the investor increase holdings in?
I know IFR assumes real rates will converge across the countries, and nominal rate difference is due to inflation rates, but doesn’t the currency with higher relative inflation rate will experience depreciation? Or this condition only holds if IFR and Relative PPP both hold (hence uncovered IRP)?