ASEAN-5 forex rates and crude oil: Markov regime-switching analysis

ABSTRACT

We investigate the influence of moves in oil prices on exchange rates of Indonesia, Malaysia, the Philippines, Singapore and Thailand (the ASEAN-5 countries). We disentangle oil shocks, representing them by three components: demand shock, supply shock and risk shock, and examine their impact on the ASEAN-5 exchange rates by employing high-/low-volatility Markov regime-switching regressions for the period 2006 to Beckmann, Czudaj, and Arora 2020. We find that demand shocks make forex rates increase for net oil-producing as well as net oil-consuming economies. The impacts of supply shocks on forex rates for most economies are rather low. The risk shocks lead to depreciating effects on the ASEAN-5 currencies, supporting the notion that the open-oriented nature of ASEAN-5 economies makes them susceptible to constant fluctuations in the global oil market.

Summary

• We study interactions between the price of crude oil and exchange rates of the ASEAN-5 economies.

• We decompose changes in oil price into demand-, supply- and risk-driven components.

• We show non-linear interrelations between movements in forex rates and price of oil.

• Demand shocks appreciate forex rates for both net oil-producer and net oil-consumer economies.

• Supply-driven moves in oil prices exercise a marginal influence on forex rates for most countries.

• Risk shocks have depreciating effects on the ASEAN-5 exchange rates.

KEYWORDS:

• Energy markets
• oil-market shocks
• exchange rate
• ASEAN-5
• Markov-switching model

JEL CLASSIFICATION:

• G1
• F31
• F33
• F36
• F45
• E44
• G15
• Q43

Acknowledgement

The third author thankfully acknowledges the support of FCT, I.P., the Portuguese national funding agency for science, research and technology, under the Project UIDB/04521/2020. The article was prepared within the framework of the Basic Research Program at HSE University. This research was partly funded by the University of Economics Ho Chi Minh City, Vietnam.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ ASEAN-5 stands for Indonesia, Malaysia, the Philippines, Singapore and Thailand, which in 1967 had founded this international association.

² China’s share of East Asia exports has grown from 6.8% in 1985 to 38% in 2018 (World Development Indicators).

³ China daily consumes 49% of the total crude oil volume, consumed in East Asia, amounting to 12 thousand kilo barrels (kb/d)

Additional information

Funding

This work was supported by the Fundação para a Ciência e a Tecnologia [UIDB/04521/2020].