When the Walk Is Not Random: Commodity Prices and Exchange Rates
by Emanuel Kohlscheen, Fernando Avalos, and Andreas Schrimpf
Bank for International Settlements
We show that there is a distinct commodity-related driver
of exchange rate movements, even at fairly high frequencies.
Commodity prices predict exchange rate movements of
eleven commodity-exporting countries in an in-sample panel
setting for horizons up to two months. We also find evidence of
systematic (pseudo) out-of-sample predictability, overturning
the results of Meese and Rogoff (1983): information embedded
in our country-specific commodity price indexes clearly helps
to improve upon the predictive accuracy of the random walk
in the majority of countries. We further show that the link
between commodity prices and exchange rates is not driven by
changes in global risk appetite or carry.
JEL Codes: F10, F31, G12.
Full article (PDF, 38 pages, 626 kb)