The relation between oil price and exchange rate : evidence from Norway

Abstract

This paper investigates if changes in the Crude Brent oil price can predict changes in the nominal Norwegian Krone – U.S. Dollar exchange rate using daily, weekly, monthly, and quarterly datasets. The predictability content is evaluated through several exercises using one-step-ahead pseudo out-of-sample forecasts. The test results yield a robust out-of-sample relationship using contemporaneous oil price changes at all test frequencies. We also find that lagged oil prices can predict future exchange rates using daily and weekly frequencies. Our main contribution is the evidence that oil prices can significantly forecast future exchange rates consistently for the sample period under consideration and that using the correct benchmark for oil price is crucial for capturing predictability. In addition, we include more recent data and we consider a new frequency where a transitory predictive ability is found using weekly data.