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Can commodity prices forecast exchange rates?

Li Liu, Siming Tan and Yudong Wang

Energy Economics, 2020, vol. 87, issue C

Abstract: Forecasting exchange rates is a challenging work. This paper investigates the predictive content of commodity prices for exchange rates. We draw a factor from prices of 17 popular commodities including crude oil to forecast exchange rates. Our results indicate that the average commodity returns can successfully predict the level and excess returns to exchange rates of currencies in Australia, Canada, New Zealand and South Africa from both in-sample and out-of-sample perspectives. The predictability of excess currency returns is further demonstrated to be economically significant. An agent with mean-variance preference who allocates her wealth between domestic and foreign bonds can improve the portfolio performance by using commodity forecasts of currency return instead of the benchmark of historical average forecasts.

Keywords: Commodity prices; Exchange rates; Currency return; Portfolio (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:87:y:2020:i:c:s014098832030058x

DOI: 10.1016/j.eneco.2020.104719

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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