Commodity price predictability: commodity currencies or global risk factor

Abstract

In this paper, I argue that global factors also have a role in forecasting commodity prices. That is, both global factors and the exchange rates of small commodity exporters have predictive power over global commodity prices. I show that part of the information embedded in these countries' exchange rates is capturing a common risk factor relevant for forecasting. Given this result, I separate the predictability coming from changes in risk appetite versus 'true commodity views' in these commodity exporters' exchange rates to better understand the composition of risks. Using both aggregate indices and individual commodity prices, I study to what extent predictability in commodity price changes coming from a global factor and how much is due to commodity exporters' idiosyncratic information.