Chen et al. (2010) report that, for "commodity currencies", the exchange rate predicts the country's commodity index but not vice versa, consistent with the Engel-West model where the country's key export prices act as the fundamentals. Predictability is assessed "against a variety of benchmarks" (the random walk, the random walk with drift, and an AR(1) process). One snag is that, commodity prices being AR(1), only that third model is valid. Deleting inappropriate benchmarks and correcting a programming error, only one out-of-sample case remains significant, not thirteen, and even that one is not robust to the test statistic. When we use a larger sample the relation becomes non-robust, at best. Commodity prices appear to be no worse than exchange rates at digesting information.
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