Reasons For Rand’s Volatility Identified

South African Rand Notes Bundles Stack

South African Rand Notes Bundles Stack

The study by Nasha Maveé, Roberto Perrelli and Axel Schimmelpfennig investigates the possible drivers of volatility in the rand and dollar exchange rate since the onset of the global financial crisis in 2008.

The mystery behind the rand’s volatility has been identified in a working paper by the International Monetary Fund, released on Monday.

Increased commodity price volatility and US economic surprises are identified as the two main drivers of rand roller-coaster ride, explains the report entitled Surprise, surprise.

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“When it comes to economic data surprises, only US surprises matter for rand volatility,” they explain. “South African surprises, including inflation surprises, do not enter as significant explanatory variable”s.

“Commodity price volatility can also contribute to exchange rate volatility,” they add, explaining commodity price volatility as a surprise in key economic data.

“Similarly, global volatility can translate into local volatility when a country is impacted by investor risk-on or risk-off sentiments”.

“Lastly, local political uncertainty can be a further source of surprises that drives exchange rate volatility.”

They explain that while South Africa cannot control commodity price volatility or global financial market volatility, it can strengthen its buffers.

These include international reserves and the reduction of external vulnerabilities. This would “reduce the susceptibility to volatility”.

“In addition, the perception of political uncertainty is something the government can influence in the way it develops and implements economic policy, as well as the way it communicates economic policy decisions.”

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