Commodity currencies and commodity prices : an empirical analysis of the relationship between commodity currency exchange rates and commodity prices

摘要

It is a well-documented fact that changes in exchange rates are very difficult to explain usingmacroeconomic fundamentals such as, money supply, real income, interest rate, tradebalance and bond supply. Forecasting models based on macroeconomic variables, tend to dono better than a random walk model in out-of-sample exercises. This phenomenon is knownas the Meese and Rogoff puzzle. We re-examine this puzzle by employing commodity pricesas an alternative variable.We find that changes in commodity prices have power in explaining fluctuations incommodity currency exchange rates both in-sample and out-of-sample. This relationship islinear in nature and strongest at the daily frequency. The relationship is present for all fourstudied economies and does not weaken when the GBP is used instead of USD as a basecurrency. The observed relationship is also robust to using either the recursive or rollingestimation scheme.We also find that controlling for asymmetries in changes in commodity prices does not leadto any significant improvements in the performance of the commodity driven exchange ratemodel. The observed relationship, however, disappears when the lagged commodity pricechange is used as the predictor instead of the realized change.