Hidden causality between oil prices and exchange rates

This work investigates the interactions between oil prices and exchange rates of 6 typical oil importers (China, Japan, and India) and exporters (Canada, Russia, and Saudi Arabia) from 2006 to 2022. We employ a novel method to capture their causal interactions, namely pattern causality, and compare the results to that based on the volatility spillover method. The empirical analysis supports most existing findings that oil prices are bidirectional correlated with exchange rates. However, unlike previous studies that only investigate positive and negative causalities, we highlight dark causality as a more complex interaction. Moreover, dark causality suggests that successive increases (decreases) in oil prices tend to drive the exchange rates of oil exporters to act in an oscillatory manner rather than in a purely positive or opposite trend, and vice versa. Furthermore, we also reveal that dark causality shows dominance during crises, e.g., the global financial crisis, the European debt crisis, the epidemic of COVID-19, and the Russia-Ukraine conflict. Revealing three types of causalities between oil prices and exchange rates helps policymakers develop more diversified macroeconomic policies. Moreover, the newly identified dark causality can be a useful indicator for investors to risk management.