Exchange rate forecasting based on oil price

This paper is aimed at finding out how well nominal oil price can predict nominal exchange rates out-of-sample compared to the random walk benchmarks. The choice of country selection for the exchange rates is based on whether the country is an oil exporter or importer. Despite using two different models, we find that for only one country (Russia) oil price is able to perform better than the random walk benchmarks. In addition, the countries that have a higher share of oil export of the total export and are net exporters are able to show short-horizon predictability of the exchange rate but only for large sample sizes. Overall, the results of the most of the countries were not better than the random walk. The fact that a country is a big net exporter and has a high oil export/import share of total export/import might be the reason why oil price is able to predict exchange rate better than the random walk.