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Commodity Prices and Markets$
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Takatoshi Ito and Andrew K. Rose

Print publication date: 2011

Print ISBN-13: 9780226386898

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226386904.001.0001

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The Relationship between Commodity Prices and Currency Exchange Rates

The Relationship between Commodity Prices and Currency Exchange Rates

Evidence from the Futures Markets

Chapter:
(p.47) 2 The Relationship between Commodity Prices and Currency Exchange Rates
Source:
Commodity Prices and Markets
Author(s):

Kalok Chan

Yiuman Tse

Michael Williams

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226386904.003.0003

This chapter examines relationships among currency and commodity futures markets based on four commodity-exporting countries' currency futures returns and a range of index-based commodity futures returns. These four commodity linked currencies are the Australian dollar, the Canadian dollar, the New Zealand dollar, and the South African rand. It is found that commodity/currency relationships exist contemporaneously, but fail to exhibit Granger-causality in either direction. The short-horizon commodity/currency relationships is analyzed using two types of restriction-based causality tests as well as a rolling out of sample forecasting methodology. No evidence of cross-asset causality or predictive ability is found in either direction. These results suggest that commodity returns information is rapidly incorporated into currency returns on a daily level. The results also suggest that economic expectations embedded in currency returns are rapidly incorporated into a country's terms-of-trade, which are embedded in commodity returns.

Keywords:   commodity prices, commodity-exporting countries, commodity returns, commodity linked currencies, cross-asset

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