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 shock in over a decade. Using high-frequency exchange rate data for 30 countries, I link the cross-section of currency movements around the event to country-specific economic and financial fundamentals. Crude export and import intensities were associated with appreciation (depreciation). Additionally, countries with higher policy interest rates and weaker financial positions experienced greater currency depreciation while safe haven currencies appreciated, consistent with 'risk-off' sentiment triggering carry trades to unwind. I also find that across currencies, estimated (pre-event) crude oil and VIX betas are tightly associated with oil-related and financial fundamentals, respectively. Therefore, exchange rate adjustment around the drone attack can also be explained by currency risk factors.

• Item Type: MPRA Paper
• Language: English
• Keywords: Commodity,currency risk, carry trade, exchange rates, oil price, terms of trade
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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