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The relationship between oil prices and exchange rates: evidences from Norway, Canada and Mexico

Nguyen, My
Master thesis
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URI
http://hdl.handle.net/11250/2383642
Date
2015
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  • Master Thesis [4657]
Abstract
In this research, we attempt to explore the short and long run relationship between real crude

oil prices and currencies of the world’s major oil exporting countries from 2000 to 2015.

More specifically, exchange rates of Canadian Dollar (CAD), Mexican peso(MXN),

Norwegian Krone (NOR) measured against United States Dollar (USD) are placed under

scrutiny. We find bidirectional causality in the case of CAD/USD and West Texas

Intermediate crude oil (WTI) prices regardless of diverse frequency, yet only unidirectional

effect running from NOK/USD to Brent price at weekly and daily data. Unfortunately, from

our out-of sample forecast experiment, either crude oil price or exchange rate cannot serve as

efficient predictor for the other. For Mexico, the indication in favour of the linkage fails to

present at all. More interestingly, we uncover a strong and robust evidence that the positive

response of CAD/ USD to WTI and connection between NOK/USD and Brent are of more

robust in daily data than in weekly data and such a pronounced influence wipes out in

monthly observations. The plausible explanation is that market participants tend to assess

constantly economic news and development, so the short-lived effect spreads over time and

vanishes at lower frequency. We indeed acknowledge that the base currency is crucial to our

findings. We also extend another avenue of our approach to assess dollar effect by switching

the denominator of exchange rates to Euro and thereafter another surprising findings show

up that Canadian dollar-Euro exchange rates and Norwegian Krone-Euro exchange rates no

longer form stable and long run linkage with their corresponding oil price indices .The role

of US dollar in the oil-currency relationship is found to be obvious in the case of Canada

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