What’s really behind rand volatility? IMF identifies possible drivers

The big issue for many South Africans is where the rand is heading and how volatility impacts on asset values and plays into business profits. But currencies are notoriously difficult to forecast, with a range of factors playing into their values. The International Monetary Fund has been doing some detailed work on the rand, with a view to investigating the possible drivers of volatility between South Africa’s currency and the dollar since 2008. The message emerging from this research is that South Africans should pay much closer attention to the US economy because surprises from the world’s biggest economy are a significant factor in the rand roller-coaster ride. Unsurprisingly political uncertainty is a source of volatility as is commodity price instability. The IMF says that while many of these factors can’t be controlled, South Africa could strengthen its reserves as a way to reduce its vulnerability. Improving the messaging on the economy would also help to reduce volatility, it indicates. – Jackie Cameron

By Matthew le Cordeur

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

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.

A cashier counts rand banknotes at the check out counter of a store in the Hatfield Plaza shopping center in Pretoria, South Africa. South Africa's Finance Minister Pravin Gordhan said he'll shore up public finances to regain market trust and show credit-rating companies the government is serious about managing debt. Photographer: Waldo Swiegers/Bloomberg
A cashier counts rand banknotes at the check out counter of a store in the Hatfield Plaza shopping center in Pretoria, South Africa. Photographer: Waldo Swiegers/Bloomberg

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.

“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 variables.

“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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