Journal of Energy Markets

Risk.net

Causality between oil prices and exchange rates: a quantile-on-quantile analysis

Mehdi Seraj, Muhammad Mar'I, Abdulkareem Alhassan and Fatma Turuc

  • We found the causal link between oil price and exchange in the five major oil-exporting countries (Saudi Arabia, Russia, Canada, United Arab Emirates, and the United State of America).
  • Using a non-linear causality approach (quantile-on-quantile model) with monthly data from April 1996 to January 2020, our findings show large fluctuations in the exchange rate of the oil-exporting countries occasioned by oil price shocks.
  • The oil exporter countries depends largely on the proceeds of oil trade. Any shock in the oil market that affects oil production and price translates to exchange rate fluctuation in the countries.

This study examines the causal link between the crude oil price and the exchange rate in five major oil-exporting countries (Saudi Arabia, Russia, Canada, the United Arab Emirates and the United States) that have recently adopted different exchange rate policies. Using a nonlinear causality approach, quantile-on-quantile, with monthly data from April 1996 to January 2020, we find causal relationships between crude oil prices and exchange rates across quantiles in all of the countries studied. A plausible explanation for such findings is that these countries are oil exporters who depend largely on the proceeds of the oil trade. Any shocks in the oil market that affect oil production and price translate t exchange rate fluctuations in these countries. Meanwhile, the effect of the oil price on the exchange rate is diverse and heterogeneous depending on the country's level of crude oil production and consumption, its exchange rate policies and the strength of its economy.

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