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Forecasting Base Metal Prices with Commodity Currencies

Pablo Pincheira () and Nicolas Hardy ()

MPRA Paper from University Library of Munich, Germany

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. Our paper is part of a growing literature that in the recent years has evaluated and called into question 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: E3 E31 E32 E37 E5 E52 F0 F00 F01 F21 F31 F47 G1 G12 G14 G15 G17 Q3 Q32 Q4 Q41 Q47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-mac
Date: 2018-01-02
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