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Do Exchange Rates Really Help Forecasting Commodity Prices?

42 Pages Posted: 30 Jul 2014 Last revised: 21 Aug 2014

Lasse Bork

Aalborg University - Department of Business and Management

Pablo Rovira Kaltwasser

Catholic University of Leuven (KUL)

Piet Sercu

FEB at KU Leuven

Date Written: August 20, 2014


Chen et al. (2010) report that for 'commodity currencies', the exchange rate predicts the country’s commodity index but not vice versa. The commodity currency hypothesis is consistent with the Engel and West (2005) exchange rate model if the fundamental is chosen to be the country’s key export prices and if the latter are exogenous to the exchange rate dynamics. In our view, however, commodity prices are essentially financial asset prices that are set in a forward-looking way, exactly like exchange rates. If both the exchange rate and the commodity prices are based on discounted future expectations, one should mostly observe contemporaneous correlations, not one-directional cross-predictability from one variable toward the other.

Using three different data sets and various econometric techniques, we do find the contemporaneous correlations as predicted by the financial asset view of commodity prices. Cross-predictability, in contrast, seems to be only minor at best, not robust to plausible variations in the test design, and bi-directional rather than one-directional. The difference between Chen et al’s empirical findings and ours is to a large extent traceable to the presence of time-averaged prices in the commodity index data that they use. Price averaging induces spurious autocorrelation and predictability that disappears if one uses e.g. month’s-end prices. Some slip-ups in their test design seem to play an additional role too.

Keywords: Commodity prices, exchange rates, Granger Causality, forecast, forecast combination

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

Suggested Citation

Bork, Lasse and Rovira Kaltwasser, Pablo and Sercu, Piet, Do Exchange Rates Really Help Forecasting Commodity Prices? (August 20, 2014). Available at SSRN: or

Lasse Bork

Aalborg University - Department of Business and Management ( email )

Aalborg, DK-9220
+45 9940 2707 (Phone)


Pablo Rovira Kaltwasser (Contact Author)

Catholic University of Leuven (KUL) ( email )

Naamsestraat 69
Leuven, 3000


Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

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