Causality in Foreign Exchange Rates and Sugar Futures Prices for Brazil and South Africa

Abstract

This study examines the causal dynamic between raw sugar futures prices and nominal exchanges (USDZAR and USDBRL respectively) for the period 1 November 2016 to 31 October 2024. The world sugar number 11 contract for raw sugar was used as a proxy for raw sugar futures as both Brazil and South Africa are global suppliers of the commodity, and daily mid nominal exchange rates were used to track currency movements. Data was transformed into natural logarithms for homogeneity. An augmented Dickey-Fuller test confirmed that variables were non-stationary at their levels but achieved stationarity after first differencing. The Johansen cointegration test indicated that neither USDZAR nor USDBRL were found to have a long-run relationship with raw sugar futures prices, requiring the use of a vector autoregression (VAR) approach instead of vector error correction model (VECM) in our analysis. Following the use of the VAR approach, we found that Granger-causality only runs in the direction from USDBRL to raw sugar futures prices, implying that short-term changes in raw sugar futures prices are influenced by currency movements in USDBRL; depreciation in USD against BRL has an increasing effect on raw sugar futures prices. A causal relation was not found for USDZAR and raw sugar futures prices. We connect this outcome to the currency- commodity framework which posits that currencies of dominant exporters of a commodity, such as Brazil, are influential on commodity prices because of the weight of the commodity’s exports on its trade balance and terms of trade. For market participants and policy makers in Brazil, this outcome may be a useful early warning signal to aid in maximising sugar export returns.