Can commodity prices predict exchange rates in developed commodity-exporting economies?

Abstract

In this paper, we study the exchange rate behavior of the commodity exporting economies Canada, Norway, Australia, and New Zealand, by testing the relationship to commodity prices and macroeconomic fundamentals. We find that commodity prices do exhibit predictive ability on exchange rates on the monthly basis when using USD as the base currency. We also find that commodity prices have a different impact on commodity exporters compared to non-commodity exporters. We conclude that commodity prices are a more powerful explanatory variable than interest rates and purchasing power parity, when forecasting insample exchange rate changes and returns on a monthly basis with the U.S. dollar as the numeraire currency. However, we must raise awareness that our findings may be induced by the strong ties between the U.S. Dollar and the commodity markets, as our initial findings fails the robustness test where British Pound Sterling is used as the numeraire currency.