Abstract
This paper examines the ‘commodity currency’ hypothesis of the Rand, that is, the postulate that the currency moves in line with commodity prices, and analyses the associated causality using nominal data between 1996 and 2010. We address both the short run and long run relationship between commodity prices and exchange rates. We find that while the levels of the series of both assets are difference stationary, they are not cointegrated. Further, we find the two variables are negatively related, with strong and significant causality running from commodity prices to the exchange rate and not vice versa, implying exogeneity in the determination of commodity prices with respect to the nominal exchange rate. The strength of the relationship is significantly weaker than other OECD commodity currencies. We surmise that the relationship is dynamic over time owing to the portfolio-rebalance argument and the Commodity Terms of Trade (CTT) effect and, in the absence of an error correction mechanism, this disconnect may be prolonged. For commodity and currency market participants, this implies that while futures and forward commodity prices may be useful leading indicators of future currency movements, the price risk management strategies may need to be recalibrated over time.
Highlights
The relationship between the Rand real exchange rate and commodity prices has been investigated in the past, but we have been unable to find a study focused on this relationship or its associated causality using nominal data
We find empirical evidence consistent with Simpson (2002), showing that US Dollar denominated nominal commodity price returns are negatively related to the nominal Rand Dollar exchange rate with significant causality running from commodity prices to the exchange rate and not vice versa
We find that a 1 per cent rise in nominal commodity prices is associated with a 0.3 per cent appreciation of the nominal exchange rate compared to 0.9 per cent for the Australian dollar found by Simpson (2002)
Summary
The relationship between the Rand real exchange rate and commodity prices has been investigated in the past, but we have been unable to find a study focused on this relationship or its associated causality using nominal data. South Africa is a major commodity exporting economy and it is partly for this reason that the Rand is nonchalantly referred to as a ‘commodity currency’ in financial markets. OECD commodity currencies have a relatively long floating history compared to South Africa − perhaps the reason why there is an abundance of studies examining their relationship with commodity prices. It is on these major commodity currencies that the theory on commodity prices and exchange rates has been built
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
