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Can oil prices forecast exchange rates?

  • Domenico Ferraro
  • Ken Rogoff
  • Barbara Rossi

This paper investigates whether oil prices have a reliable and stable out-of-sample relationship with the Canadian/U.S. dollar nominal exchange rate. Despite state-of-the-art methodologies, the authors find little systematic relation between oil prices and the exchange rate at the monthly and quarterly frequencies. In contrast, the main contribution is to show the existence of a very short-term relationship at the daily frequency, which is rather robust and holds no matter whether the authors use contemporaneous (realized) or lagged oil prices in their regression. However, in the latter case the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 11-34.

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Date of creation: 2011
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Handle: RePEc:fip:fedpwp:11-34
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