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The real world of foreign exchange of course looks rather different, with currencies being continuously buffeted by a panoply of forces from across the globe of which some will be of a short-term, passing nature, while others will be more fundamental in nature and exert their influence over a long period of time.

The rand is generally regarded as a commodity currency, along with e.g. the Australian dollar, the Chilean peso, the Brazilian real, etc. But is it really true that the exchange rate of the rand mainly takes its cue from commodity prices?

A recent study by staff members of the Bank for International Settlements (BIS) of the behaviour of the exchange rates of 11 commodity exporting countries, including South Africa, provides some useful and interesting perspectives on the most important drivers of the exchange rate of the rand.

The study develops a country-specific commodity price index for each country, depending on its commodity export profile. The South African basket is made up of 10 commodities, with platinum, coal and iron ore being the top three in terms of their weight in the index (gold comes in at number 5 on the list).

The Brazilian country-specific commodity price index is the least volatile of the 11 countries, followed by South Africa. South Africa’s index is furthermore highly correlated (80%+) with those of Australia and Peru. By contrast, the South African rand is the second most volatile commodity currency after the Russian rouble.

It is quite striking that all countries (except Russia) with a higher share of commodity exports than South Africa experience less exchange rate volatility, in spite of South Africa’s country-specific commodity price index being relatively less volatile.
Although commodity exports account for approximately 60% of South Africa’s total exports, it is still substantially less than for, for example, Australia (79%), Chile (85%), and Russia (80%), but comparable to Brazil (63%).

The study concludes that for 10 of the 11 commodity-exporting countries included in the study exchange rate, movements can be predicted based on observed changes in commodity prices on a daily basis for time horizons of up to 2 months, with a monthly horizon producing the most robust result. The exception is South Africa, underlining the unpredictability of rand movements!


Furthermore, although each country’s exchange rate is strongly correlated with its own commodity price index, the oil price tends to have a general influence on commodity currencies, even for non-oil exporting countries, due to the high correlation between oil price movements and those for other commodities.

Because commodity export prices tend to trump import price changes, the terms-of-trade for these countries are very sensitive to price movements in commodity markets. They therefore provide immediately available information on the direction in which the nominal equilibrium exchange rate is moving.

An interesting conclusion is that movements in commodity prices is useful for explaining exchange rate movements that are unrelated to changes in risk appetite, measured by the volatility index (VIX) of the Chicago Board Options Exchange. In other words, commodity prices have their own independent influence on exchange rates apart from the risk-on, risk-off trade.

They likewise dominate short-term government bond yield differentials (so-called carry) as a driver of exchange rates, with the partial exception of Australia and Canada. This result points yet again to the futility of the SARB trying to stem weakness in the rand by raising interest rates (as recognised by the SARB).

What should one conclude from all this? What does it add to our knowledge of the causes of fluctuations in the exchange rate of the rand?

The conclusion seems to be clear: the rand is indeed a commodity currency, but it behaves less like one than its peer group. Clearly the rand is to a greater extent influenced by other forces, including financial flows of a fundamental as well as position taking nature, making it the least predictable commodity currency.

This makes life rather difficult for all and sundry that have a vested interested in the external value of the rand, from the SARB to businesses in the tradeable sectors of the economy. The lesson: do not try to predict the exchange rate, rather hedge the risk!

Kohlscheen, E., Avalos, F.H. and Schrimpf, A.: When the Walk is not Random: Commodity Prices and Exchange Rates. BIS Working Papers no. 551. March 2016.

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