Palm Oil Price–exchange Rate Nexus in Indonesia and Malaysia

Abstract

In this study, we extend the literature analyzing the predictive content of commodity prices for exchange rates by examining the role of palm oil price. Our analysis focuses on Indonesia and Malaysia, the two top producers and exporters of palm oil, and utilizes daily data covering the period from December 12, 2011 to March 29, 2021, which is partitioned into two sub-samples based on the COVID-19 pandemic. Relying on a methodology that accommodates some salient features of the variables of interest, we find that on average the in-sample predictability of palm oil price for exchange rate movements is stronger for Indonesia than for Malaysia. While Indonesia’s exchange rate appreciates due to a rise in palm oil price regardless of the choice of predictive model, Malaysia’s exchange rate only appreciates after adjusting for oil price. However, both exchange rates do not seem to be resilient to the COVID-19 pandemic as they depreciate amidst dwindling palm oil price. Similar outcomes are observed for the out-of-sample predictability analysis. We highlight avenues for future research and the implications of our results for portfolio diversification strategies.

Has COVID-19 intensified the oil price–exchange rate nexus?

“…With reference to the financial literature, few studies have been conducted on the impact of the pandemic on foreign exchange markets ( Devpura, 2020 , Mishra et al, 2020 , Narayan, 2020a , Narayan et al, 2021 , Rai and Garg, 2021 , Salisu and Sikiru, 2003 ) and stock markets ( Ali et al, 2020 , Baig et al, 2021 , Haroon and Rizvi, 2020a , Haroon and Rizvi, 2020b , He et al, 2020 , Gil-Alana and Claudio-Quiroga, 2020 , Prabheesh, 2020 , Sharma, 2020 ). The overall conclusion from the findings of the above studies indicate that the pandemic has adversely affected the energy and foreign exchange markets.…”

Understanding Global Commodity Price Shocks on Exchange Rates and Inflation in Emerging Economies: ARDL Perspective

“…In Malaysia, there is evidence of a unidirectional causal relationship running from the nominal exchange rate to oil prices in both the long and short run [34]. Similarly, in Ghana, variations in commodity prices, such as cocoa and crude oil, have a significant influence on the nominal exchange rate [35]. The synchronization between international commodity prices and capital inflows to developing countries has also been observed, leading to double boom-bust cycles and increased vulnerability for commoditydependent economies [18].…”

Palm Oil Downstream Strategy: Enhancing Indonesia's Bargaining Position in International Palm Oil Trade

“…Regardless of the prediction model employed, the Indonesian exchange rate appreciates as palm oil prices increase. In contrast, the Malaysian exchange rate appreciates only after factoring in oil prices (Salisu & Sikiru, 2021). This research aimed to highlight the importance of Indonesia's development of downstream palm oil industries and the potential benefits associated with producing highvalue downstream products from CPO.…”