Commodity Currencies and Causality: Some High-Frequency Evidence

Abstract

I investigate the link between economic fundamentals and exchange rate adjustment to commodity price fluctuations. I overcome the traditional issue of simultaneity by exploiting the September 14, 2019 drone attack on two Saudi Arabian refineries as a natural experiment. This unanticipated event caused the largest 1-day global crude oil price shock in over a decade. Using high-frequency exchange rate data for 30 countries, I link the cross-section of exchange rate movements around the event to country-specific fundamentals and currency risk factors. Crude export and import intensities were associated with appreciation (depreciation). Additionally, countries with higher policy interest rates and weaker financial positions experienced greater currency depreciation while safe haven currencies appreciated, consistent with ‘risk-off’ sentiment triggering carry trades to unwind. Estimated (pre-event) crude oil and VIX betas can also explain the cross-section of exchange rate adjustment, and these currency risk factors are tightly associated with oil-related and financial fundamentals, respectively.

Keywords: Commodities, Exchange Rates, Terms of Trade, Oil Price