Forecasting Exchange Rates with Commodity Convenience Yields

This paper investigates whether commodity convenience yields - the yields that accrue to the holders of physical commodities - can predict the exchange rate of commodity-exporters' currencies. Predictability is a consequence of the fact that i) convenience yields are useful predictors for commodity prices and ii) commodity currencies have a strong relationship with commodity prices. The empirical evidence indicates that there is a significant relationship between aggregate measures of convenience yields and commodity currencies' exchange rate, both in-sample and outof- sample. A high level of convenience yields strongly predicts a depreciation of the Australian, Canadian and New Zealand dollars exchange rates at horizons of 1 to 24 months.