Four harmonic cycles explain and predict commodity currencies' wide long term fluctuations

Abstract

In theory and practice, it is difficult to accept a particular model of explanation and forecasting of exchange currencies as the literature review reveals. However, the currencies that are called commodity currencies, such as the Australian dollar are heavily influenced by commodity prices cycles, and hence they might be easier to analyze and predict. We investigate the possibility that the Australian dollar is primarily determined by a handful of harmonic cycles which in turn are based not only on commodity prices cycles but also on commodity production cycles and in general on economic cycles. In this way we can get a very good fit of the relevant data and good out-of-sample forecasts. We cross check these results by referring to the main issues involved, such as fundamentals, short and long cycles, and so on. In addition, our analysis, forecasting ability, and conclusions still hold for three more commodity currencies examined here: New Zealand's dollar, Canada's dollar, and Norway's krone.