Hot Commodity? The Commodity Currency Hypothesis and the Financialisation of Commodity Markets

Sammanfattning: Movements in the commodity markets can have profound effects on the global economy by affecting the cost of food, metal, and energy goods. As such, the prospect of predicting commodity price fluctuations, thereby allowing for better inflation control, production planning and even humanitarian aid, has long generated great interest. The Commodity Currency Hypothesis offers such a possibility, allowing researchers and practitioners to predict commodity prices by studying the movements of the so-called commodity currencies. These currencies are thought to move in close tandem with, but ahead of, certain commodities and sometimes even commodity indices, thereby allowing for improved predictions of those commodities. This study has, using more recent data than major studies in the field, provided some support in favour of the Commodity Currency Hypothesis. Moreover, we have also shown that the direction and significance of the commodity-currency relationship described is likely to be time-variant and provided some indications on why this might be the case. Furthermore, we discuss the possible implications of this for the practicality of the Currency Commodity Hypothesis. Our results are of great importance for policy makers and business practitioners, as the Commodity Currency Hypothesis, if true, offers a mechanism through which they can base predictions of inflation and cost levels.