Long‐run Determinants of the Brazilian Real: A Closer Look at Commodities

Abstract

We use cointegration analysis to show that the long‐run behaviour of the Brazilian Real effective exchange rate between January 1999 and September 2012 can largely be explained by the price variation of a basket of five commodities—that accounted for 51% of Brazilian export revenues in 2011. We estimate that a 10% variation in the real price of these five commodities moves the fundamental long‐run real exchange rate by almost 5%. Changes in interest rate differentials do not explain short or long term movements in the exchange rate during this period. Furthermore, we find that deviations of the real effective exchange rate from the long run equilibrium level have an estimated half‐life of approximately 8 months. The growing exports of oil and fuel and of iron ores, as well as the important oil discoveries in the pre‐salt layer, suggest that commodity prices will continue to influence the value of the Real in the future. Copyright © 2014 John Wiley & Sons, Ltd.

Commodity prices and the Brazilian real exchange rate

“…Thus, the hypothesis that there is a long‐run relationship between the Brazilian real exchange rate and the world prices of the major commodities exported by Brazil is not rejected. These findings are consonant with Kohlscheen (2014) and Veríssimo and Xavier (2013). According to Cashin et al (2004), the cointegrating relationship between real exchange rate and commodity prices results of higher wages caused by the higher commodity prices.…”

“…It puts upward pressure on prices of non‐traded goods and eventually causes an appreciation of the real exchange rate. Kohlscheen (2014) suggests that this mechanism is in line with the recent dynamics of these variables in Brazil. From the empirical standpoint, evidence of cointegration rules out the possibility of “spurious regression.”…”

“…This index is a measure of the market's expectation based on options on the S&P500 index. The VIX has been usually used as a proxy of uncertainty on the international financial market (Silvennoinen & Thorp, 2013) and global risk perception (Kohlscheen, 2014). Second, we use the change of the JP Morgan's Emerging Markets Bond Index, namely the EMBI+ Brazil ( s t = Δ embi t ).…”

“…In Brazil, the share of commodity exports in Brazilian merchandise exports remained around 60% between 2010 and 2015 (UNCTAD, 2015, 2017), consolidating Brazil in the group of commodity‐dependent developing countries and the Brazilian real (BRL) in the group of commodity currencies 1 . Kohlscheen (2014) conjectured that the important oil discovery in the pre‐salt layer suggests that commodity prices will continue to influence the BRL in the future. Using simulation methods, the results in Magalhães and Domingues (2014) showed that the pre‐salt layer discovery would increase the expansion of oil exports in detriment of manufacturing exports.…”

Prediction of Malaysian Exchange Rate Using Microstructure Fundamental and Commodities Prices: A Machine Learning Method

“…Moreover, besides the microstructure fundamentals, the commodities prices have also considered as an important determinant of the exchange rate in export oriented economies. The literature provides robust empirical evidences to show the relationship between the exchange rate and commodity prices in the developed economies [6][7][8][9].…”