The asymmetric relationship between the oil price and the US-Canada exchange rate

Using non-linear autoregressive distributed lag models (NARDL) and Granger causality testing, this paper examines whether there are asymmetric long-run and short-run relationships between US-Canada exchange rate and the real price of oil over the period January 1982 to March 2019. In this examination, we account for macroeconomic differences across Canada and the US to arrive at three key findings. First, we find a bidirectional long-run cointegrating relationship between the real price of oil and the US-Canada exchange rate. Second, in this bidirectional relationship, the long-run asymmetry runs from the US-Canada exchange rate to the real price of oil, a finding that is statistically robust as the parameters of the NARDL models are stable with well-behaved errors. Third, the Granger causality testing indicates that the short-run asymmetry mainly runs from the US-Canada exchange rate to the real price of oil; this reinforces the long-run results.