The relationship between crude oil futures and exchange rates in the context of the Covid-19 shock: a tale of two markets

Ziliang Yu, Yanan Liu, Huiting Mang and Xiaomeng Liu

Abstract

We examine the high-frequency intraday return and volatility transmission between crude oil futures prices and exchange rates during the 2020 Covid-19 pandemic in the context of two markets: the newly established renminbi-denominated Shanghai International Energy Exchange in China and the US-dollar-denominated Brent market in the United Kingdom. By controlling for the influence of the stock markets, our findings reveal significant disparities in return linkages, yet fairly comparable volatility transmission patterns. The International Energy Exchange shows no return linkages with exchange rates except before the shock, while Brent consistently shows return spillovers from crude oil futures prices to exchange rates. In both markets, the volatility spillovers from exchange rates to crude oil futures prices are unidirectional prior to the shock but become bidirectional as a result of the shock. Nevertheless, both the return and volatility spillover patterns in China resemble those in the United Kingdom when utilizing offshore instead of onshore exchange rates. Such similarities in return and volatility spillovers can also be observed during the 2022 Covid-19 shock that emerged in Shanghai. These findings have significant practical implications.