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The predictive relationship between exchange rate expectations and base metal prices

Pablo Pincheira () and Nicolas Hardy ()

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we show that survey-based-expectations about the future evolution of the Chilean exchange rate have the ability to predict the returns of the six primary non-ferrous metals: aluminum, copper, lead, nickel, tin and zinc. Predictability is also found for returns of the London Metal Exchange Index. Previous studies have shown that the Chilean exchange rate has the ability to predict copper returns, a world commodity index and base metal prices. Nevertheless, our results indicate that expectations about the Chilean peso have stronger predictive ability relative to the Chilean currency. This is shown both in-sample and out-of-sample. By focusing on expectations of a commodity currency, and not on the currency itself, our paper provides indirect but new and strong evidence of the ability that commodity currencies have to forecast commodity prices. Our results are also consistent with the present-value-model for exchange rate determination.

Keywords: Forecasting; commodities; univariate time-series models; out-of-sample comparison; exchange rates; copper; base metals (search for similar items in EconPapers)
JEL-codes: C1 C10 C2 C22 C3 C32 C49 C52 C53 C58 E0 E31 E32 E37 E4 E42 E44 E47 F31 F32 F37 F4 F44 F47 M21 Q3 Q31 Q37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-mac and nep-pay
Date: 2018-10-09
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