Forecasting base metal prices with the Chilean exchange rate

Pablo Pincheira and Nicolas Hardy

Resources Policy, 2019, vol. 62, issue C, 256-281

Abstract: In this paper we show that the Chilean exchange rate has the ability to predict the returns of the London Metal Exchange Index and of the six primary non-ferrous metals that are part of the index: aluminum, copper, lead, nickel, tin and zinc. The economic relationship hinges on the present-value theory for exchange rates, a floating exchange rate regime and the fact that copper represents about a half of Chilean exports and nearly 45% of Foreign Direct Investment. Consequently, the Chilean peso is heavily affected by fluctuations in the copper price. As all six base metal prices show an important comovement, we test whether the relationship between copper prices and Chilean exchange rates also holds true when it comes to the six primary non-ferrous metals. We find interesting evidence of predictability both in-sample and out-of-sample with traditional statistical measures. We also show that the information contained in the Chilean peso can successfully be used to obtain positive returns when trading base metals. Our paper is part of a growing literature that in the recent years has evaluated the ability of commodity currencies to forecast commodity prices.

Keywords: Forecasting; Commodities; Prices; Univariate time-series models; Out-of-sample comparison; Exchange rates; Copper; Primary non-ferrous metals (search for similar items in EconPapers)
JEL-codes: C52 C53 E27 E37 F37 G17 L74 O18 R31 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:62:y:2019:i:c:p:256-281

DOI: 10.1016/j.resourpol.2019.02.019

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