June 2017 issue contents
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)