## Surprise, Surprise: What Drives the Rand / U.S. Dollar Exchange Rate Volatility?

_IMF Working Papers, October 17, 2016_

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## Bibliographic details
- Authors: Nasha Maveé, Roberto Perrelli, Axel Schimmelpfennig
- Published: October 17, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475545425.001

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### Summary and research question
- Investigates possible drivers of volatility in the South African rand since the onset of the global financial crisis.
- Assesses the role of:
  - local and international economic surprises,
  - commodity price volatility,
  - global market risk perceptions,
  - local political uncertainty.
- Measure of rand volatility: a market-based implied volatility indicator for the rand / U.S. dollar exchange rate.
- Economic surprises captured by Citi’s Economic Surprise Index available for South Africa and its main economic partners.

### Methodology
- Uses a market-based implied volatility indicator for the rand / U.S. dollar exchange rate as the dependent variable.
- Uses Citi’s Economic Surprise Index (difference between market expectations and data prints) for South Africa, the United States, Europe, and China.
- Examines commodity price volatility, global market volatility, and a measure of domestic political uncertainty as explanatory variables.

### Key findings
- Rand volatility is mainly driven by:
  - commodity price volatility,
  - global market volatility,
  - domestic political uncertainty.
- Economic surprises originating in the United States matter for rand volatility.
- Economic surprises originating from South Africa, Europe, or China do not have a significant effect on rand volatility (as reported).

### Policy-relevant implications
- Monitoring commodity price volatility and global market risk perceptions is important for understanding and managing rand volatility.
- Domestic political uncertainty is a significant domestic determinant—addressing political uncertainty could reduce exchange rate volatility.
- Attention to U.S. economic surprises is warranted given their measurable impact on rand volatility; domestic and regional economic surprises appear less influential in this context.

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