Can Exchange Rates Forecast Commodity Prices? A Reconsideration

Engel and West (2005) model log exchange rates as discounted log fundamentals. For ‘commodity currencies’, commodity prices are often viewed as key fundamentals, implying that commodity prices should, therefore, be predicted by exchange rates and not vice-versa - which would run counter to a vast literature that regards commodities as financial assets, whose price changes are normally hard to predict.

Prior empirical results have not lead to a consensus. Using more and cleaner data, various frequencies, different indices like principal components and Efficient Y-Index regression (EYRe), and a wider array of tests (including model averaging and trading tests), we find no asymmetric predictive ability either way; the link is essentially contemporaneous.

Keywords: Commodity Prices, Exchange Rates, Granger Causality, Forecast, Forecast Combination

JEL Classification: C22, C52, C53, F31, F47

Suggested Citation: Suggested Citation

Bork, Lasse and Rovira Kaltwasser, Pablo and Rovira Kaltwasser, Pablo and Sercu, Piet M. F. A., Can Exchange Rates Forecast Commodity Prices? A Reconsideration (February 03, 2018). Available at SSRN: https://ssrn.com/abstract=2473624 or http://dx.doi.org/10.2139/ssrn.2473624