Co-movement between carbon emissions and forex market: A tale of COVID-19 outbreak and Russia-Ukraine invasion

Carbon emissions, a fast-moving environmental problem, is truly becoming an overarching international financial sensation. The carbon emission challenges faced during the COVID-19 and Russia Ukraine War adversely affected forex market. This paper attempts to unravel the frequency co-movement of carbon emissions with forex market. We consider daily observation of carbon emissions (CE) and forex market proxied by Euro (EUR), Japanese Yen (JPY), British Pound Sterling (GBP), Australian Dollar (AUD) and Canadian Dollar (CAD) against United States Dollar (USD). These currencies exchange rates are analyzed since their volatility and trading have been particularly high. We collect daily observation of these markets extending form December 31, 2019 to February 10, 2023 and employ wavelet analysis for the empirical computation. The result unfolds that there is a strong and positive co-movement between carbon emissions and exchange rate during the COVID-19 period in the long run for CAD, AUD, GBP and weak for EUR and JPY. However, JPY is in anti-phase relationship with carbon emission in 128–256 frequencies. In addition, JPY leads the relationship during COVID-19 outbreak and Russia-Ukraine invasion respectively. This study ventures to offer insight to the policy analyst, investors and portfolio managers.