I’ve written before about the link between exchange rates and commodity prices. A weaker dollar (when measured against gold or commodity currencies) is associated with stronger commodity prices and vice versa. I don’t need confirmation of this since I can believe my eyes, but others question whether the exchange rate is cause or effect. Now Yu-chin Chen, Kenneth Rogoff and Barbara Rossi have published a paper which uses commodity currencies to predict future commodity prices (via Voxeu):

In a recent paper (Chen, Rogoff and Rossi, 2008), we demonstrated that a carefully chosen set of exchange rates, those we call “commodity currencies”, may indeed offer such an alternative approach to the forecasting of commodity prices.

Using data obtained over the past one to three decades for Australia, Canada, Chile, New Zealand, and South Africa – all small commodity exporters with market-based floating exchange rates – we find that their currencies embody remarkable forecasting power for future global commodity price movements. Individually, these exchange rates can forecast the prices of their country’s major commodity exports, and together, they do an excellent good job at predicting aggregate commodity market movements.

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