Volatility of the Real Exchange Rate of the Rand: 1990-2004

by HODGE, D. , 2005
Research Report, Employment Growth & Development Initiative, Human Sciences Research Council

This paper forms part of the Human Sciences Research Council’s project on exchange rates and employment (MACRO006), which seeks to understand the impact of exchange rate fluctuations on employment in South Africa. It serves as a preliminary, qualitative study of the volatility of the rand. Hodge starts by explaining the nature of the foreign exchange market, and then discusses how speculation can occur in this market, even though such activities are prohibited by exchange controls. It then explains briefly how the real effective exchange rate of the rand is derived and why it is the best single indicator in this regard. The next section distinguishes between the existing level of the exchange rate, the volatility of the trend in the exchange rate, and the volatility of the exchange rate around its trend. This is followed by a discussion on the level and volatility in the trend of the real effective exchange rate of the rand, a qualitative analysis of the reasons for such volatility, and the volatility around the trend. The final section describes the various types of risk to which companies are exposed through changes in the exchange rate and how they might protect themselves against such risks. Empirical studies of the size of these effects will be the subject of subsequent working papers in this area.