Commodity Futures and Forecasting Commodity Currencies

This paper analyzes the extent to which information in commodity futures markets is useful for out-of-sample forecasting of commodity currencies. In the earlier literature, commodity price changes are documented to be weak out-of-sample predictors of commodity currency return. In contrast, we find that the basis of several commodities may contain useful information, but the usefulness of any particular commodity basis varies over time and depends on the nature of the commodity. In particular, it seems the basis of commodities with relatively high storage costs tend to be more useful. We argue that high storage costs will tend to make the basis more prone to fluctuations in commodity risk and therefore provide information about the risk premium for commodity currencies. We implement forecast combination strategies that take full advantage