Stock Prices and Exchange Rates in Australia: Are Commodity Prices the Missing Link?

There are still significant gaps in our knowledge of the relationship between stock prices and exchange rates; not least, the ambiguity about the sign of the coefficient linking them. One explanation which we explore in the Australian context in this paper is the omission of commodity prices. We show that a relationship which omits commodity prices performs poorly but, once commodity prices are added, our results are plausible and robust. We also throw light on the commodity-currency issue: the link from the exchange rate to commodity prices is stronger and more consistent than that in the opposite direction.