Cyclinaclity Effects of Exchange Rates and Oil Prices
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Sep 30, 2024
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Abstract
Understanding the concept of time scales is crucial when modeling economic and financial decisions. Within the time-frequency domain, this study delves into the relationship between fluctuations in oil prices and exchange rates across major oil-importing and exporting countries. The investigation employs various cross-wavelet techniques within the continuous wavelet transform framework, with a particular focus on wavelet coherence and phase-difference over the period 2000 to 2020. The results underscore a notable diversity in the connection between the oscillations of oil prices and exchange rates across diverse countries. This relationship is subject to temporal variations and is contingent upon the specific time horizon under consideration. In particular, our analysis reveals strong co-movements between oil prices and exchange rates across various time intervals and frequencies. Importing oil countries like New Zealand, Singapore, Brazil, and Taiwan exhibit particularly pronounced co-movements. Similarly, exporting oil countries such as Kuwait, Mexico, Russia, and Canada also display strong associations between oil prices and exchange rates. These correlations are intricately tied to key macroeconomic events, further highlighting the complex interplay between oil prices and exchange rate movements in different global regions. While a robust connection is evident in numerous countries, the strength of the relationship appears significantly weaker in several others. This variance underscores the nuanced nature of the association between the fluctuations in oil prices and exchange rates across the global landscape.
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Keywords
Continuous wavelet approachWavelet coherency approachbusiness cycleoil pricesexchange ratesand wavelet power spectra
References
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• Jassim Aladwani is a distinguished academic in economics and finance, holding a PhD from RMIT University. For the past three years, he has been an Assistant Professor at Box Hill College in Kuwait, where he has taught courses in macroeconomics, microeconomics, monetary policy, and applied econometrics. Passionate about advancing knowledge, Dr. Aladwani focuses on research related to consumer behavior, market trends, and fiscal policy. His impressive publication record includes studies on money supply impacts, consumer preferences for organic products, and transportation efficiency in developing economies. Committed to bridging economic theory and policy, Dr. Aladwani aims to address real-world challenges, particularly in emerging markets.
• Ahmad, A., & Hernandez, R. (2013). Asymmetric adjustment between oil prices and exchange rates: Empirical evidence from major oil producers and consumers. Journal of International Financial Markets, Institutions and Money, 27, 306-317.
• Ahmad, W., Prakash, R., Uddin, G., Rishman, C., Rahman, L., & Dutta, A. (2021). On the intraday dynamics of oil price and exchange rate: What can we learn from China and India? Energy Economics, 91, 104871.
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• Aguiar-Conraria, L. & Soares, M.J. (2011a) Oil and the macroeconomy: using wavelets to analyze old issues. Empirical Economics 40(3): 645–655.
• Aguiar-Conraria, L. & Soares, M.J. (2011b) Business cycle synchronization and the Euro: a wavelet analysis. Journal of Macroeconomics 33(3): 477–489.
• Al-Aali, A., Sagafi-Najad, T., & Azam, M. (2008). Oil prices and the Kuwaiti dinar: Evidence from an asymmetric cointegration approach. OPEC Energy Review, 39(1), 27-36.
• Amano, R., & Van Norden, S. (1998). Oil prices and the rise and fall of the US real exchange rate. Journal of International Money and Finance, 17(2), 299-316.
• Anjum, H. (2019). Estimating volatility transmission between oil prices and the US dollar exchange rate under structural breaks. Journal of Economics and Finance, 43(4), 750-763.
• Arnold, G., Gourène, Z., & Mendy, P. (2018). Oil prices and African stock markets co-movement: A time and frequency analysis. Journal of African Trade, 5, 55-67.
• Arouri, E., Fouquau, J., & Nguyen, K. (2011). Oil prices, exchange rates, and emerging stock markets. Energy Policy, 39(1), 18-25. https://doi.org/10.1016/j.enpol.2010.09.010.
• Ayadi, A., Omrane, W., Lazrak, S., & Yan, X. (2020). OPEC production decisions, macroeconomic news, and volatility in the Canadian currency and oil markets. Finance Research Letters, 37, 101366.
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• Basher, S., Haug, A., & Sadorsky, P. (2012). Oil prices, exchange rates, and emerging stock markets. Energy Economics, 34(1), 227-240.
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• Baek, J., & Kim, H. Y. (2020). On the relation between crude oil prices and exchange rates in sub-Saharan African countries: A nonlinear ARDL approach. The Journal of International Trade and Economic Development, 29(1), 119-130.
• Beckmann, J., Czudaj, R., & Arora, V. (2019). The relationship between oil prices and exchange rates: Revisiting theory and evidence. Energy Economics, 88, 104772.
• Belasen, A., & Demirer, R. (2019). Commodity-currencies or currency-commodities: Evidence from causality tests. Resources Policy, 60(C), 162-168.
• Blokhina, E., Karpenko, A., & Guirinskiy, V. (2017). The relationship between oil prices and exchange rate in Russia. Russian Peoples' Friendship University Economic Journal, 25(1), 46-55.
• Blomberg, B., & Harris, E. (1995). The commodity-consumer price connection: Fact or fable? Economic Policy Review, 1(3), 21-35.
• Bouri, E., Shahzad, H., Raza, N., & Roubaud, D. (2017). Relationship between oil prices and exchange rates: A wavelet approach. Energy Economics, 67, 242-254.
• Boer, L., Pescatori, A., & Stuermer, M. (2023). Not all energy transitions are alike: Disentangling the effects of demand and supply-side policies on future oil prices. IMF Working Papers, WP/23/160. https://doi.org/10.5089/9781513619454.001
• Braha, F., Lafuente, E., Grigoli, F., & Tran, H. T. (2019). Oil and exchange rate volatility in emerging markets. Energy Policy, 126, 131-144.
• Brahmasrene, T., Huang, J., & Sissoko, Y. (2014). Crude oil prices and exchange rates: Causality, variance decomposition, and impulse response. Energy Economics, 44(C), 407-412.
• Brayek, B., Sebai, S., & Naoui, K. (2015). A study of the interactive relationship between oil price and exchange rate: A copula approach and a DCC-MGARCH model. The Journal of Economic Asymmetries, 12(2), 173-189.
• Buetzer, S., Habib, M., & Stracca, L. (2012). Global exchange rate configurations: Do oil shocks matter? ECB Working Paper No. 1442. Retrieved from
• Caldara, D., Cavallo, M., & Iacoviello, M. (2019). Oil price elasticities and oil price fluctuations. Journal of Monetary Economics, 103, 1-20.
• Campbell, R., & Côté, A. (2018). The macroeconomic risks of Canadian oil price shocks. Bank of Canada Staff Discussion Paper No. 2018-11. Retrieved from
• Cazelles, B., Chavez, M., Berteaux, D., Ménard, F., Vik, J., Jenouvrier, S., & Stenseth, C. (2008). Wavelet analysis of ecological time series. Oecologia, 156(2), 287-304.
• Chan, H., & Maheu, M. (2002). Conditional jump dynamics in stock market returns. Journal of Business & Economic Statistics, 20(3), 377-389.
• Chang, H., Huang, L., & Chin, M. (2013). Interactive relationships between crude oil prices, gold prices, and the NT–US dollar exchange rate—A Taiwan study. Energy Policy, 63, 441-448.
• Chowdhury, K., & Garg, B. (2022). Has COVID-19 intensified the oil price–exchange rate nexus? Economic Analysis and Policy, 76, 280-298.
• Cordova, A., Pedraza, C., & Ramírez, G. (2018). The impact of oil price fluctuations on the exchange rate of the Mexican peso. Economía Mexicana Nueva Época, 27(2), 465-495.
• Crespo, A., Rodriguez, O., & Silva, C. (2019). Dynamic linkages between oil prices and exchange rates in Mexico. Resources Policy, 60, 289-299.
• Dagher, J., & Yun, M. (2016). Oil price volatility, monetary policy, and exchange rate pass-through. International Monetary Fund Working Paper No. 16/4. Retrieved from
• De Schryder, S., & Peersman, G. (2015). The U.S. dollar exchange rate and the demand for oil. The Energy Journal. International Association for Energy Economics.
• Drygalla, A. (2022). Monetary policy in an oil-dependent economy in the presence of multiple shocks. Review of World Economics, 159(2), 185-214.
• Duna, W., Adnan, K., Abdur, R., & Khalid, K. (2021). How geopolitical risk drives exchange rate and oil prices? A wavelet-based analysis. Energy Sources Part B: Economics, Planning, and Policy, 16(1), 861-877.
• Fowowe, B. (2014). Modelling the oil price–exchange rate nexus for South Africa. International Economics, 140, 36-48. https://doi.org/10.1016/j.inteco.2014.05.002
• Garzón, A., & Hierro, L. (2022). Inflation, oil prices, and exchange rates: The euro's dampening effect. Journal of Policy Modeling, 44(1), 130-146.
• Golub, S. (1983). Oil prices and exchange rates. The Economic Journal, 93(371), 576-593.
• Hatemi-J, A., & Irandoust, M. (2010). Exchange rates and oil prices in Sweden: An application of the ARDL bounds test approach. Energy Economics, 32(6), 1431-1435.
• Hussain, A., Basheer, A., & Masud, S. (2017). International trade and exchange rate behavior. European Online Journal of Natural and Social Sciences, 6(4), 1-17.
• Hudgins, D.M., Sandford, S.A., Allamandola, L.J., & Tielens, A.G.G.M., (1993). Mid- and far-infrared spectroscopy of ices, optical constants and integrated absorbances. Astrophys. J. Suppl. Ser. 86, 713–870.
• Iqbal, J., Nosheen, M., & Who, M. (2023). Exchange rate volatility and India–US commodity trade: Evidence of the third country effect. Indian Economic Review, 58(2), 359-398.
• Ito, T. (2018). The exchange rate in a dynamic macroeconomic framework: A Post-Keynesian perspective. Cambridge University Press.
• Johnson, M., & Lee, S. (2020). Monthly economic indicators: A comprehensive analysis of trends. Journal of Applied Economics, 1, 13-14.
• Kilian, L., & Park, C. (2009). The impact of oil price shocks on the US stock market. International Economic Review, 50(4), 1267-1287.
• Kim, Y., Lee, H., Brigljević, B., & Yoo, Y. (2021). Regional variations in exchange rates: A comparative analysis using Brent, WTI, and OPEC oil prices. International Journal of Energy Economics and Policy.
• Kim, J., & Jung, H. (2018). Dependence structure between oil prices, exchange rates, and interest rates. The Energy Journal, 39(2), 259-280.
• Kumeka, T., Uzoma-Nwosu, D., & David-Wayas, M. (2022). The effects of COVID-19 on the interrelationship among oil prices, stock prices, and exchange rates in selected oil exporting economies. Resources Policy, 77, 102744.
• Malakhovskaya, O., & Minabutdinov, A. (2014). Are commodity price shocks important? A Bayesian estimation of a DSGE model for Russia. International Journal of Computational Economics and Econometrics, 4(2), 148–180.
• Malik, F., & Umar, Z. (2019). Dynamic connectedness of oil price shocks and exchange rates. Energy Economics, 84, 104501.
• Mensi, W., Hammoudeh, S., Shahzad, S., Al-Yahyaee, K., & Shahbaz, M. (2017). Oil and foreign exchange market tail dependence and risk spillovers for MENA, emerging, and developed countries: VMD decomposition-based copulas. Energy Economics, 67, 476-495.
• Mishra, P., Rathi, A., & Chatterjee, R. (2018). The effects of oil price shocks on the exchange rate and stock market in Russia. Journal of Economic Studies, 45(6), 1252-1270.
• Nakajima, T., & Hamori, S. (2012). Causality-in-mean and causality-in-variance among electricity prices, crude oil prices, and yen–US dollar exchange rates in Japan. Research in International Business and Finance, 26(3), 371-386.
• Nielsen, K., & Suardi, S. (2010). The role of oil prices in the exchange rate: A Bayesian approach. Journal of International Money and Finance, 29(5), 754-773.
• Ng, S., & Poshakwale, S. (2019). Oil prices and exchange rates: Evidence from BRICS countries. Journal of Policy Modeling, 41(4), 652-666.
• Nguyen, K., & Wen, Y. (2020). Oil prices, exchange rates, and asset prices of small open economies: Evidence from Canada. Journal of Financial Economics, 136(3), 835-852.
• Nouira, R., Amor, T., & Rault, C. (2019). Oil price fluctuations and exchange rate dynamics in the MENA region: Evidence from non-causality-in-variance and asymmetric non-causality tests. The Quarterly Review of Economics and Finance, 73(2), 126-138.
• Percival, D. B., & Walden, A. T. (2000). Wavelet methods for time series. Cambridge University Press.
• Rai, K., & Garg, B. (2022). Dynamic correlations and volatility spillovers between stock price and exchange rate in BRIICS economies: Evidence from the COVID-19 outbreak period. Applied Economics Letters, 29(8), 738-745.
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• Jassim Aladwani is a distinguished academic in economics and finance, holding a PhD from RMIT University. For the past three years, he has been an Assistant Professor at Box Hill College in Kuwait, where he has taught courses in macroeconomics, microeconomics, monetary policy, and applied econometrics. Passionate about advancing knowledge, Dr. Aladwani focuses on research related to consumer behavior, market trends, and fiscal policy. His impressive publication record includes studies on money supply impacts, consumer preferences for organic products, and transportation efficiency in developing economies. Committed to bridging economic theory and policy, Dr. Aladwani aims to address real-world challenges, particularly in emerging markets.
How to Cite
Aladwani, Jassim. 2024. “Cyclinaclity Effects of Exchange Rates and Oil Prices”. Studies in Business and Economics 27 (2). https://doi.org/10.29117/sbe.2024.0153.
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Articles