Forecasting Base Metal Prices with Commodity Currencies

19 Pages Posted: 4 Jan 2018

See all articles by Pablo M. Pincheira

Pablo M. Pincheira

Adolfo Ibanez University - School of Business

Nicolas Hardy

Universidad Finis Terrae

Date Written: January 2, 2018


In this paper we show that the Chilean exchange rate has the ability to predict the returns of the London Metal Exchange Index and of the six primary non-ferrous metals that are part of the index: aluminum, copper, lead, nickel, tin and zinc. The economic relationship hinges on the present-value theory for exchange rates, a floating exchange rate regime and the fact that copper represents about a half of Chilean exports and nearly 45% of Foreign Direct Investment. Consequently, the Chilean peso is heavily affected by fluctuations in the copper price. As all six base metal prices show an important co-movement, we test whether the relationship between copper prices and Chilean exchange rates also holds true when it comes to the six primary non-ferrous metals. We find interesting evidence of predictability both in-sample and out-of-sample. Our paper is part of a growing literature that in the recent years has evaluated and called into question the ability of commodity currencies to forecast commodity prices.

Keywords: Forecasting, Commodities Prices, Univariate Time-Series Models, Out-of-Sample Comparison, Exchange Rates, Copper, Primary Non-Ferrous Metals

JEL Classification: C52, C53, G17, E270, E370, F370, L740, O180, R310

Suggested Citation

Pincheira, Pablo M. and Hardy, Nicolas, Forecasting Base Metal Prices with Commodity Currencies (January 2, 2018). Available at SSRN: or

Pablo M. Pincheira (Contact Author)

Adolfo Ibanez University - School of Business ( email )

Diagonal Las Torres 2640

Nicolas Hardy

Universidad Finis Terrae ( email )

Av. Pedro de Valdivia 1509
Santiago, Santiago

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