Crude oil price and exchange rate: Evidence from the period before and after the launch of China's crude oil futures

Abstract

This study investigates whether the relationships between China's exchange rate, domestic crude oil price, and the international crude oil price have a switch in the period before and after China's crude oil futures launched by Shanghai International Energy Exchange (INE) using the MS-VAR model. We find that, although China's oil price is strongly influenced by the international crude oil market, its effect on the international crude oil price is weak; Since the launch of INE crude oil futures in the new regime, the fluctuations in the US dollar against the RMB (USD/CNY) exchange rate has had a significant positive effect on China's crude oil prices. Placebo test results demonstrate that the launch of Brent or Oman crude oil futures, which are US dollar-dominated, do not have the same effects as the launch of INE crude oil futures. This implies that the positive impact of the USD/CNY exchange rate on the INE crude oil futures price may be transmitted to China's crude oil spot market.