Commodity Currencies: Why are Exchange Rate Futures Biased if Commodity Futures are Not?

14 Pages Posted: 8 Feb 2007

See all articles by Jonathan Kearns

Jonathan Kearns

Bank for International Settlements (BIS) - Monetary and Economic Department

Abstract

This paper adds to the well-documented puzzle of the forward bias of exchange rates. While the exchange rate of a small commodity-exporting economy, such as Australia, can be closely tied to commodity prices, this paper demonstrates empirically that a portfolio of commodity futures exhibits little, if any, bias. A microfounded small open economy model is developed in which the exchange rate depends on export commodity prices. This is used to demonstrate how systematic expectation errors about the monetary process could cause the bias in exchange rate forwards when there is an absence of bias in commodity futures.

Suggested Citation

Kearns, Jonathan, Commodity Currencies: Why are Exchange Rate Futures Biased if Commodity Futures are Not?. Economic Record, Vol. 83, No. 260, pp. 60-73, March 2007, Available at SSRN: https://ssrn.com/abstract=961898 or http://dx.doi.org/10.1111/j.1475-4932.2007.00376.x

Jonathan Kearns (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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