Can Exchange Rates Really Forecast Commodity Prices?

Lasse Bork, Pablo Kaltwasser, Piet Sercu and Tom Vinaimont
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Lasse Bork: Aalborg University
Pablo Kaltwasser: University of Leuven
Piet Sercu: University of Leuven
Tom Vinaimont: Nazarbayev University, Graduate School of Business

No 2023/04, Working Papers from Nazarbayev University, Graduate School of Business

Abstract: Chen, Rogoff and Rossi (2010) report that, for 'commodity currencies', the exchange rate can predict the country's commodity index but not vice versa, consistent with the Engel-West model where the country's key export prices act as the fundamentals. However, their conclusion is not robust to the test statistic. Out-of-sample, at the 10 percent level, they find ample evidence of predictability 'against a variety of benchmarks' (the random walk, the random walk with drift, and an AR(1) process). As commodity prices in their sample are AR(1), only the latter benchmark is valid, and against that one we find nearly no evidence of predictability. Our findings remain when we use a larger sample suggesting that both commodity and currency prices react immediately to current events and anticipate the future to the extent possible. If both are equally forward-looking, neither should be predictable.

JEL-codes: C22 C52 C53 F31 F47 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2023-08
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