Can Exchange Rates Forecast Commodity Prices?

49 Pages Posted: 21 Mar 2008 Last revised: 27 Jun 2010

See all articles by Yu-Chin Chen

Yu-Chin Chen

Harvard University

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Barbara Rossi

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Barcelona Graduate School of Economics

Date Written: March 2008

Abstract

We show that "commodity currency" exchange rates have remarkably robust power in predicting global commodity prices, both in-sample and out-of-sample, and against a variety of alternative benchmarks. This result is of particular interest to policymakers, given the lack of deep forward markets in many individual commodities, and broad aggregate commodity indices in particular. We also explore the reverse relationship (commodity prices forecasting exchange rates) but find it to be notably less robust. We offer a theoretical resolution, based on the fact that exchange rates are strongly forward looking, whereas commodity price fluctuations are typically more sensitive to short-term demand imbalances.

Suggested Citation

Chen, Yu-Chin and Rogoff, Kenneth S. and Rossi, Barbara, Can Exchange Rates Forecast Commodity Prices? (March 2008). NBER Working Paper No. w13901. Available at SSRN: https://ssrn.com/abstract=1112013

Yu-Chin Chen

Harvard University ( email )

Cambridge, MA 02138
United States

Kenneth S. Rogoff (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Room 232
Cambridge, MA 02138
United States
617-495-4022 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Barbara Rossi

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Register to save articles to
your library

Register

Paper statistics

Downloads
76
Abstract Views
1,398
rank
317,044
PlumX Metrics