When the walk is not random: commodity prices and exchange rates

BIS Working Papers No 551
March 2016

Published in: International Journal of Central Banking, vol 13, no 2, June 2017, pp 121-58.

We show that there is a distinct commodity-related driver of exchange rate movements, even at fairly high frequencies. Commodity prices predict exchange rate movements of 11 commodity-exporting countries in an in-sample panel setting for horizons up to two months. We also find evidence of systematic (pseudo) out-of-sample predictability, overturning the results of Meese and Rogoff (1983): information embedded in our country-specific commodity price indices clearly helps improving upon the predictive accuracy of the random walk in the majority of countries. We further show that the link between commodity prices and exchange rates is not driven by changes in global risk appetite or carry.

JEL classification: F10, F31, G12

Keywords: commodities, exchange rates, interest rates