Behaviour of Malaysia and Australia Exchange Rate in Response to the Prices of Commodities

A country's exchange rate and commodity price forms a two-way relationship. However, past researches showed that the exchange rate has weaker effects towards commodity price. Hence, This study focuses on the behaviour of exchange rate in response to commodity price. This work will analyzed the behaviour of Malaysia and Australia in response to commodity price is to forecast future exchange rate. This study will determine if there exists a trend in the historical commodity price and exchange rate of Australia and Malaysia over the period of 2005 to 2015. Other than observing the relationship, the exchange rate for the 2016 was also forecast by using the historical data. Historical data of price of petroleum in Malaysia and price of iron ore in Australia will be used to predict the following year's price Historical data are fitted into two prediction models which are Purchasing Power Parity (PPP) model and Autoregressive models. The most appropriate and accurate model was evaluated. Result showed that autoregressive models was found to be the best prediction model and is used to predict the future exchange rate. Using the autoregressive model, forecasted the exchange rate in 2016 was 3.417 AUD/MYR.