The Essence of Relationships between the Crude Oil Market and Foreign Currencies Market Based on a Study of Key Currencies

Round 1

Reviewer 1 Report

I would like to see the following improvements in the manuscript before making a concrete decision on it:

1. the authors should improve the introduction section by providing emphasis on the motivation and intended contribution of this research to the existing literature.
2. the authors should provide a full explanation before using the abbreviations.
3. the authors should provide a footnote that they are willing to share their data set in Excel format with those who wish to replicate the results of this research.
4. the results should be interpreted further with their policy implications.
5. the authors should provide some guidelines for future studies in this research area.
6. the manuscript needs to be checked and edited by a native speaker for grammatical and syntax errors.

Author Response

Manuscript energies-1450945

Response to 1^st Review

Dear Reviewer,

We would like to express our appreciation for the review. We have incorporated all the suggestions made by the reviewer. Those changes are highlighted within the revised manuscript file with tracked changes.

We would like to refer to the detailed reviewer’s suggestions below.

Reviewer’s comment: the authors should improve the introduction section by providing emphasis on the motivation and intended contribution of this research to the existing literature.

Authors’ response: The Introduction have been extended as follows:

“The relationship between the price of crude oil and the US dollar is an essential com-ponent of the modern economic system. This relationship has an impact on the profitability of many industrial sectors such as petroleum industry, transportation industry, chemical industry, financial sector, food industry etc. In addition, it has an impact on the budget revenues, expenditures and inflation of many countries. The study of this relationship is therefore an important aspect of broader research on the transfer of market shocks in the global economy.”

“In this paper we will assess the strength of the transmission of supply shocks in the crude oil market towards the largest economies in the world. The similarities and differences in the correlation between crude oil and currencies make it possible to forecast the resilience of economies to changes in commodity prices. The present transformations of the economic structure of the world caused by climate protection will lead to significant changes in the markets of energy resources. The results of our research will help to assess the long-term impact of these changes on the global economy.”

Reviewer’s comment: the authors should provide a full explanation before using the abbreviations.

Authors’ response: We added a full explanations of the used abbreviations in the table placed just before references, which is as follows:

“Nomenclature:

WTIF  Forward crude oil prices WTI

WTI    WTI Crude oil is popularly traded grade of oil West Texas Inter-mediate

USD    United States dollar

CNY    Chinese Yuan Renminbi

EUR    Euro

SAR    Saudi Riyal

JPY     Japanese Yen

RUB    Russian Ruble

NBUSBIS       Nominal Broad Effective Exchange Rate for United States

NBXMBIS      Nominal Broad Effective Exchange Rate for Euro Area

NBSABIS       Nominal Broad Effective Exchange Rate for Saudi Arabia

NBRUBIS       Nominal Broad Effective Exchange Rate for Russia

NBCNBIS       Nominal Broad Effective Exchange Rate for China

NBJPBIS        Nominal Broad Effective Exchange Rate for Japan

Nominal Broad Effective Exchange Rate     Nominal Broad Effective Exchange Rate is calculated as geometric weighted average of bilateral exchange rates. Broad indices comprise 60 economies

CCC    Constant Conditional Correlation model

DCC    Dynamic Conditional Correlation model

ARCH Auto-Regressive Conditional Heteroskedasticity model or effect

GARCH          Generalized Autoregressive Conditional Heteroskedasticity model

SGARCH        Standard Generalized Autoregressive Conditionally Heteroskedastic model

EGARCH        Exponential Generalized Autoregressive Conditional Heteroskedastic model

BIS      Bank for International Settlements

FED    Federal Reserve System”

Reviewer’s comment: the authors should provide a footnote that they are willing to share their data set in Excel format with those who wish to replicate the results of this research

Authors’ response: We have added a footnote in the Data Availability Statement paragraph, which is:

“The data presented in this study are available on request from the corresponding author.”

Reviewer’s comment: the results should be interpreted further with their policy implications.

Authors’ response: We updated the 6th paragraph as follows:

“Research results in this paper also contribute to shaping future economic policy. This is important from the perspective of the climate challenges and energy transition. A fall in crude oil demand caused by changes in the economy structure of developed countries may lead to a downward trend in oil prices in the long term. As a consequence, it will cause a crisis in the petroleum industry, which will lead to the depreciation of the currencies of the exporting countries. Exporters with a poorly diversified economy will be in the most difficult situation. On the other hand, oil-importing countries will be less dependent on oil, hence their currencies may appreciate. It will depend on their energy self-sufficiency and the appropriate transformation of the industry. Countries that will remain oil importers will be exposed to a stronger depreciation of the currency in the long run. It will be caused by the growing economic exclusion caused by the outdated structure of the economy. Economic policy objectives should focus on coordinating the transformation of the economy with the process of reducing the importance of crude oil as an energy resource.”

Reviewer’s comment: the authors should provide some guidelines for future studies in this research area.

Authors’ response: We have extended the summary as follows:

“Our research was an attempt to assess the relationship between the most important raw material so far, which is crude oil, and the exchange rates of economically important countries. In our opinion, the assumed goal was achieved to a significant extent. However, there were also some limitations. We did not extend our methodological approach to other types of correlation, including cross-correlation. Moreover, the problem of the causality re-quires further development. Additionally, research could be extended to include further energy resources. That's all ahead of us. Our motivation is the intensification of the trans-formation processes towards a low-carbon economy, which creates new challenges and research goals.”

Reviewer’s comment: the manuscript needs to be checked and edited by a native speaker for grammatical and syntax errors

Authors’ response: The text was checked by a native speaker.

Author Response File: Author Response.docx

Reviewer 2 Report

This paper explores the relationship between exchange rates and oil prices. Using the recent period of change in the US dollar relationship the paper considers five other currencies to explore what is happening in the crude oil-exchange rate relationship in a broader context. The modelling is conducted in a DCC-GARCH framework (with allowance for asymmetry in the model) over the period from 2002 to 2021. The analysis discusses the likely factors driving time variation in the correlations.

With the exception of Chinese and Russian exchange rates all of the other figures show a short duration large change in correlations early in the COVID pandemic period. One wonders if this is then a leverage point in the data that might be impacting model parameters across the whole sample. Would you be able to run a sensitivity analysis for at least one country that does not include this data and compare the impacts on the estimated parameters and time varying correlations?

Author Response

Manuscript energies-1450945

Response to 2^nd Review

Dear Reviewer,

We would like to express our appreciation for the review. We would like to refer to the detailed reviewer’s suggestions below:

Reviewer’s comment: This paper explores the relationship between exchange rates and oil prices. Using the recent period of change in the US dollar relationship the paper considers five other currencies to explore what is happening in the crude oil-exchange rate relationship in a broader context. The modelling is conducted in a DCC-GARCH framework (with allowance for asymmetry in the model) over the period from 2002 to 2021. The analysis discusses the likely factors driving time variation in the correlations.

With the exception of Chinese and Russian exchange rates all of the other figures show a short duration large change in correlations early in the COVID pandemic period. One wonders if this is then a leverage point in the data that might be impacting model parameters across the whole sample. Would you be able to run a sensitivity analysis for at least one country that does not include this data and compare the impacts on the estimated parameters and time varying correlations?

Authors’ response: We think this is an excellent suggestion. We tried to do this sensitivity analysis. However, we did have some problems with how to select the high leverage data points. Hence, the results of such a study could be inconclusive. Therefore, we decided to more carefully incorporate the analysis suggested by the reviewer into our methodology. We will try to present results for all variables in future research.

Author Response File: Author Response.docx

Reviewer 3 Report

General comments

The main objective of the manuscript is to analyze the evolution of the level of correlation between the dollar exchange rate and the oil price in international markets. For this purpose, an elaborate econometric methodology is used.

Specific comments

My specific recommendations are as follows:

• Given that, admittedly, the econometric methodology is not within the reach of everyone, I believe that, given the vast spectrum of possible readers of the manuscript, it would benefit if it were provided, in introductory terms, at least one visualization of the raw data, followed by a simple correlation analysis and, ideally, a (time-series) cross-correlation analysis. The latter is easily accomplished through R’s ccf function.
• Following that recommendation, the authors may want to leave that (time-series) cross-correlation analysis for future work. In any case, adopting a good scientific practice, the concluding section should be added with the limitations of the work which could, precisely, give rise to future studies.
• Finally, for the sake of reproducibility, the authors should be generous by providing the (access to the) raw data.

Author Response

Manuscript energies-1450945

Response to 3^rd Review

Dear Reviewer,

We would like to express our appreciation for the review and we would like to refer to the detailed reviewer’s suggestions below:

Reviewer’s comment: My specific recommendations are as follows:

• Given that, admittedly, the econometric methodology is not within the reach of everyone, I believe that, given the vast spectrum of possible readers of the manuscript, it would benefit if it were provided, in introductory terms, at least one visualization of the raw data, followed by a simple correlation analysis and, ideally, a (time-series) cross-correlation analysis. The latter is easily accomplished through R’s ccf function.
• Following that recommendation, the authors may want to leave that (time-series) cross-correlation analysis for future work. In any case, adopting a good scientific practice, the concluding section should be added with the limitations of the work which could, precisely, give rise to future studies.

Authors’ response: Thank you for pointing this out. We consider reviewer’s comments valuable for our research work. We want to use cross-correlation analysis in our future publication. We will try to compare the obtained results with previous studies. As suggested by the reviewer we have added the following text containing the limitations of our current research:

“Our research was an attempt to assess the relationship between the most important raw material so far, which is crude oil, and the exchange rates of economically important countries. In our opinion, the assumed goal was achieved to a significant extent. However, there were also some limitations. We did not extend our methodological approach to other types of correlation, including cross-correlation. Moreover, the problem of the causality re-quires further development. Additionally, research could be extended to include further energy resources. That's all ahead of us. Our motivation is the intensification of the trans-formation processes towards a low-carbon economy, which creates new challenges and research goals.”

Reviewer’s comment: Finally, for the sake of reproducibility, the authors should be generous by providing the (access to the) raw data.

Authors’ response: We have also added a footnote in the Data Availability Statement paragraph, which is:

“The data presented in this study are available on request from the corresponding author.”

Author Response File: Author Response.docx

Round 2

Reviewer 1 Report

Accept as is

Author Response

Manuscript energies-1450945

Dear Editor,

We would like to express our appreciation for the comment. We have incorporated all the suggestions. Those changes are highlighted within the revised manuscript file with tracked changes. We would like to refer to the detailed comment below.

Editor’s comment: The paper has been revised but there are some issues still pending. For example: in the Conclusions, it should be elaborated on the pathways for further research (simply stating that "Additionally, research could be extended to include further energy resources. That's all ahead of us" is not enough). Both the Abstract and the Conclusions need to explain what were the outcomes (and implications stemming from these outcomes) of this paper, not what the intentions of the paper has been. Finally, the newly inserted parts need to be proofread by the native English speaker - some sentences need restructuring or are not very clear.

Authors’ response: The Conclusions have been extended as follows:

“The results of our research suggest the lack of a stable relationships between prices of crude oil and currency exchange rates. It is also impossible to observe a long-term, unequivocal tendency of the currencies of oil exporting countries being positively correlated with oil prices. Russia was the closest to this situation. In Saudi Arabia, a positive correlation emerged during moments of a crisis. The US dollar has a unique status by being settlement currency. However, considering the process of the USA transforming from an oil importer to oil exporter, this is not reflected in a change of the dollar to oil correlation from a negative to a positive one. This finding attests to some deeper reasons shaping the above correlation, which are of a structural nature.

Consequently, future studies on the sustainability of a correlation between crude oil and currencies should encompass the identification of causes as well as their type and power of impact on how the said relationship is shaped. This particularly applies to issues connected with monetary policy, aversion to risk in financial markets, capital transfers to emerging markets, or crude oil stocks, as mentioned in the discussion. In our opinion, future investigations should focus on the following three areas:

• the influence of inflation and public debt cost (yields on government bonds) on the level of correlations between currencies and oil;
• the impact of investment capital transfers from developed to emerging markets and of the associated risk on the level of correlations between currencies and oil,
• the effect of structural parameters of economies of oil exporting and importing countries on the above correlation, including: the net demand for this raw material, level of strategic stocks, or the scale of industry diversification.

The above directions in research should allow us to determine the dynamic hierarchy of causes shaping the relationship between oil and currencies. This will contribute to better management of crisis situations in the oil and currency markets.”

The Abstract was extended as follows:

“(…)The results of our research suggest the lack of a stable relation-ships between prices of crude oil and currency exchange rates. It is also impossible to observe a long-term, unequivocal tendency of the currencies of oil exporting countries being positively correlated with oil prices. Russia was the closest to this situation. In Saudi Arabia, a positive correlation emerged during moments of a crisis.”

All inserted parts were proofread by the native English speaker. The corrections are all highlighted within the manuscript with tracked changes.

Author Response File: Author Response.docx