The Relationship between Commodity Prices and Currency Exchange Rates

Kalok Chan, Yiuman Tse and Michael Williams

in Commodity Prices and Markets

Published by University of Chicago Press

Published in print March 2011 | ISBN: 9780226386898
Published online February 2013 | e-ISBN: 9780226386904 | DOI:
The Relationship between Commodity Prices and Currency Exchange Rates

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This chapter examines relationships among currency and commodity futures markets based on four commodity-exporting countries' currency futures returns and a range of index-based commodity futures returns. These four commodity linked currencies are the Australian dollar, the Canadian dollar, the New Zealand dollar, and the South African rand. It is found that commodity/currency relationships exist contemporaneously, but fail to exhibit Granger-causality in either direction. The short-horizon commodity/currency relationships is analyzed using two types of restriction-based causality tests as well as a rolling out of sample forecasting methodology. No evidence of cross-asset causality or predictive ability is found in either direction. These results suggest that commodity returns information is rapidly incorporated into currency returns on a daily level. The results also suggest that economic expectations embedded in currency returns are rapidly incorporated into a country's terms-of-trade, which are embedded in commodity returns.

Keywords: commodity prices; commodity-exporting countries; commodity returns; commodity linked currencies; cross-asset

Chapter.  10950 words.  Illustrated.

Subjects: Business and Management

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