Can commodity prices forecast exchange rates?

Forecasting exchange rates is a challenging work. This paper investigates the predictive content of commodity prices for exchange rates. We draw a factor from prices of 17 popular commodities including crude oil to forecast exchange rates. Our results indicate that the average commodity returns can successfully predict the level and excess returns to exchange rates of currencies in Australia, Canada, New Zealand and South Africa from both in-sample and out-of-sample perspectives. The predictability of excess currency returns is further demonstrated to be economically significant. An agent with mean-variance preference who allocates her wealth between domestic and foreign bonds can improve the portfolio performance by using commodity forecasts of currency return instead of the benchmark of historical average forecasts.

• Publication year

  2020

• Venue

  Energy Economics

• Publication date

  2020-03-01

• Fields of study

  Economics

• Identifiers
  DOI 10.1016/j.eneco.2020.104719
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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