Commodity Currencies and Commodity Prices: Modelling Static and Time-Varying Dependence

Abstract

This paper employs the copula approach to study the relationship between exchange rates and commodity prices for large commodity exporters. Using data for the nominal exchange rates of four commodity currencies (Australian, Canadian, and New Zealand dollars, and Norwegian krone) against the US dollar and the relevant country-specific commodity price indices, constructed on a daily basis, we find: (i) a positive dependence between the values of commodity currencies and commodity indices, i.e. a commodity index increases when a respective currency appreciates, and provide several explanations for this finding; (ii) no major asymmetries in the tail dependence for most pairs of exchange rates and commodity indices; (iii) a pronounced increase in the time-varying tail dependence following the global financial crisis.