Commodity Currencies and Causality: Some High-Frequency Evidence

Ahmed, Rashad (2019): Commodity Currencies and Causality: Some High-Frequency Evidence.

Abstract

I investigate the link between economic fundamentals and exchange rate adjustment to commodity price fluctuations. I overcome the traditional issue of simultaneity by exploiting the September 14, 2019 drone attack on two Saudi Arabian refineries as a natural experiment. This unanticipated event caused the largest 1-day global crude oil price spike in over a decade. Using high-frequency exchange rate data for 30 countries, I measure each currency’s return around the event window, and link currency return heterogeneity to country-level economic and monetary fundamentals. Crude export and import intensities were associated with appreciation (depreciation). In addition, countries with current account surpluses, as opposed to deficits, and greater international reserves saw more currency appreciation, thereby buffering the depreciating effects on crude oil importers. Countries with higher policy interest rates, consisting of mostly Emerging Market economies, experienced greater depreciation conditional on crude oil export/import exposure.

• Item Type: MPRA Paper
• Language: English
• Keywords: Commodity, exchange rates, oil price, terms of trade
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q43 - Energy and the Macroeconomy

References

Joshua Aizenman, Mahir Binici, and Michael M. Hutchison. The Transmission of Federal Reserve Tapering News to Emerging Financial Markets. International Journal of Central Banking, 12(2):317–356, June 2016.

Joshua Aizenman, Sebastian Edwards, and Daniel Riera-Crichton. Adjustment patterns to commodity terms of trade shocks: The role of exchange rate and international reserves policies. Journal of International Money and Finance, 31(8):1990–2016, 2012.

Paul Cashin, Luis F. Cespedes, and Ratna Sahay. Commodity currencies and the real exchange rate. Journal of Development Economics, 75(1):239–268, October 2004.

Yu-chin Chen and Kenneth Rogoff. Commodity currencies. Journal of International Economics, 60(1):133–160, May 2003.

Yu-Chin Chen, Kenneth S. Rogoff, and Barbara Rossi. Can Exchange Rates Forecast Commodity Prices? The Quarterly Journal of Economics, 125(3):1145–1194, 2010.

Sebastian Edwards. Commodity Export Prices and the Real Exchange Rate in Developing Countries: Coffee in Colombia. In Economic Adjustment and Exchange Rates in Developing Countries, NBER Chapters, pages 233–266. National Bureau of Economic Research, Inc, October 1986.

Refet S. Gu¨rkaynak and Jonathan H. Wright. Identification and Inference Using Event Studies. Manchester School, 81:48–65, September 2013.

Maurizio Michael Habib, Sascha Bu¨tzer, and Livio Stracca. Global Exchange Rate Configurations: Do Oil Shocks Matter? IMF Economic Review, 64(3):443–470, August 2016.

Emanuel Kohlscheen, Fernando Avalos, and Andreas Schrimpf. When the Walk Is Not Random: Commodity Prices and Exchange Rates. International Journal of Central Banking, 13(2):121–158, June 2017.

Dongwon Lee and Yu chin Chen. What Makes a Commodity Currency? Working Papers 201420, University of California at Riverside, Department of Economics, September 2014.

Christopher J. Neely. Unconventional monetary policy had large international effects. Journal of Banking & Finance, 52(C):101–111, 2015.

Basher Syed Abul, Haug Alfred A, and Sadorsky Perry. The impact of oil shocks on exchange rates: A Markov-switching approach. MPRA Paper 68232, University Library of Munich, Germany, December 2015.