The Fluctuation Factors of Commodity Currencies: Exporting Resource Countries vs. Importing Resource Countries (Financial Modeling and Analysis)

Abstract

This paper focuses on Australian and Canadian commodity currencies and discusses an empirical analysis of their operation as a carry trade. The objective of the empirical analysis was to identify the correlation between the yield spread between the Australian 10-year government bond (or Canadian 10-year government bond) and the Japanese 10-year government bond and the related commodity markets from 2012 to 2022 using autoregressive distributed lags. The estimation results show that both of the two types of yield spreads are statistically significantly negative correlated with gold futures. In Canada-Japan, the correlation was also statistically significant positive with energy resource (crude oil and natural gas) and major mineral (iron ore and copper) futures, providing evidence that could suggest the possibility of risk management using the relevant commodity markets. On the other hand, there were some variables for which the Australia-Japan results differed from the Canada-Japan estimates or were not statistically significant. This suggests that the related commodities, especially natural gas, coal, and iron ore, with the exception of gold futures, are not suitable for risk management of the Australia-Japan yield spread.