When a country's main export becomes more valuable, its currency can actually crash because investors see it as a signal to sell.
Usually, a country's currency rises when the price of its exports (like oil or gold) goes up. But the paper finds that in certain high-investment regimes, a positive price shock triggers mass profit-taking, causing the currency to drop precisely when the country is getting richer.
Breaking the Link: Risk, Carry, and Commodity Currencies
SSRN · 6392120
This paper investigates the stability of the relationship between commodity prices and exchange rates using a novel dataset of daily, country-specific commodity export price indices for ten major commodity-exporting economies. We first show that the relationship between exchange rates and commodity prices varies substantially over time, and at times breaking down entirely. We then examine the state-dependent nature of the commodity-currency relationship using threshold local projections. Our res