Looking Under the Hood of Commodity Currency Predictability

85 Pages Posted: 14 Sep 2023

See all articles by Alexandre Jeanneret

Alexandre Jeanneret

UNSW Business School

Valeri Sokolovski

University of Alberta - School of Business

Date Written: June 04, 2024

Abstract

This paper revisits the exchange rate predictability of commodity currencies. We identify currencies with significant contemporaneous exposure to commodity prices, exploring both net commodity exporters and importers. For these currencies, a country's exchange rate fluctuations can be predicted by changes in its commodity export/import prices, both in-sample and out-of-sample. However, this predictability is short-lived, concentrated in periods of high uncertainty, and observed exclusively among less traded currencies. These findings align with a gradual information diffusion mechanism, suggesting a temporal market inefficiency rather than a risk-based explanation. Our work offers new insights into the source of carry trade predictability.

Keywords: Exchange rates, carry trade, predictability, commodities, information

Suggested Citation

Jeanneret, Alexandre and Sokolovski, Valeri, Looking Under the Hood of Commodity Currency Predictability (June 04, 2024). UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4564504 or http://dx.doi.org/10.2139/ssrn.4564504

Alexandre Jeanneret (Contact Author)

UNSW Business School ( email )

Sydney, NSW 2052
Australia

Valeri Sokolovski

University of Alberta - School of Business ( email )

2-43 Business Building
Edmonton, Alberta T6G 2C7
Canada

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