Exchange Rate Movements

by NGANDU, S., 2006
Policy brief, Employment Growth & Development Initiative, Human Sciences Research Council

This paper forms part of an Human Sciences Research Council project on exchange rates and employment, which seeks to understand the impact of exchange rate fluctuations on employment in South Africa. Exchange rate movements have a strong influence on a country’s level of economic activity. Exchange rate volatility introduces an element of risk and hence the level of investment that firms are willing to make. Whether this result holds is more of an empirical question. This is especially true given the ambiguous results from theoretical models. Some of the factors that have contributed to the volatility of the South African currency include increased capital inflows, which have been mainly short-term portfolio investments, with a significant proportion of the daily rand trade being driven by foreign portfolio and speculative flows. Commodity prices have also had their hand in determining movements in the country’s currency, with gold and platinum accounting for roughly 25% of South Africa’s exports, making them strong determinants of the exchange rate.