Do monetary policy announcements affect foreign exchange returns and volatility? Some evidence from high-frequency intra-day South African data.

This paper examines the temporal effect of domestic monetary policy surprises on both the levels and volatility of the South African rand/United States dollar exchange rate. The analysis in this ‘event study’ proceeds using intra-day minute-by-minute exchange rate data, repo rate data from the South African Reserve Bank’s scheduled monetary policy announcements, and Bloomberg market consensus repo rate forecasts. We find statistically and economically significant responses in intra-day high-frequency exchange rate returns and volatility to domestic interest rate surprises, but anticipated changes have no bearing on the rand. Our results suggest that monetary policy news is an important determinant of the exchange rate for approximately 5 to 40 minutes after the estimated time of the pronouncement  – suggesting a relatively high degree of market ‘efficiency’ in its mechanical sense (and not ‘efficient’ market in the deeper economic-informational sense) in processing this information.