Forecasting fuel prices with the Chilean exchange rate: Going beyond the commodity currency hypothesis

Pablo Pincheira, Andrea Bentancor, Nicolas Hardy and Nabil Jarsun

Energy Economics, 2022, vol. 106, issue C

Abstract: In this paper we show that the Chilean exchange rate has the ability to predict the returns of oil and of three additional oil-related products: gasoline, propane and heating oil. We show this using both in- and out-of sample exercises at multiple horizons. Natural explanations for our findings rely on the well know “dollar effect” and on the present-value theory for exchange rate determination in combination with the strong co-movement displayed by fuel and metal prices. Given that the Chilean economy is heavily influenced by copper, which represents nearly 50% of total national exports, the floating Chilean Peso is importantly affected by price fluctuations in this metal. As oil-related products display an important co-movement with base metal prices, it is reasonable to expect evidence of Granger causality from the Chilean peso to these oil-related products. Interestingly, we provide sound evidence indicating that the predictive ability of the Chilean Peso goes beyond these natural explanations. In particular, we show another plausible predictive channel: volatility in combination with a negative contemporaneous leverage effect in fuel returns. Finally, we compare the Chilean peso with other commodity-currencies in their ability to predict fuel returns. The Chilean peso fares extremely well in this competition, especially at short horizons of one, three and six months.

Keywords: Exchange rates; Energy; Oil; Gasoline; Commodity prices; Predictability; Time-series (search for similar items in EconPapers)
JEL-codes: C22 C32 C52 C53 E17 E27 E37 E51 E58 F31 F37 F47 G12 Q30 Q41 Q43 Q47 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:106:y:2022:i:c:s014098832100637x

DOI: 10.1016/j.eneco.2021.105802

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