TITLE:
The Commodity Price and Exchange Rate Dynamics
AUTHORS:
Liping Zou, Boliang Zheng, Xiaoming Li
KEYWORDS:
Exchange Rate, Commodity Price, Forecasting
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.6,
October
20,
2017
ABSTRACT: This paper investigates
the dynamic relationship between the commodity price and the exchange rate in
Australia and New Zealand. We focus on Australia and New Zealand. Not only do their primary commodities account for significant shares
of their exports, but also their currencies share some distinctive characteristics
that are unique from other commodity currencies. Using country-specific
commodity price indices, we examine the relationship between the departure of
currency value from its fair value and fundamental macroeconomic variables.
Evidence of a strong and robust relationship between the exchange rate and the
commodity price has been found. Results indicate that the commodity price can
be used to improve the forecast ability of the future exchange rate. Our
commodity-price-augmented exchange rate forecasting model consistently outperforms
the random-walk model, for both in-sample and out-of-sample forecasting. These
results shed some extra lights on policymaking for countries that rely on
primary commodity production, and attempt to move towards floating exchange
rate regimes as part of their global market liberalization process.