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Order flow and rand/dollar exchange rate dynamic

9 April 2019
Publication Type: Policy Brief
JEL Code: F31, F33, G14, G21

This study investigates the impact of order flow on the rand/dollar exchange rate over the short and long term. It uses a hybrid model which combines microeconomic and macroeconomic determinants of the exchange rate in the short and long term. The analysis uses monthly series from January 2004 to December 2016. We find that order flow explains movements in the exchange rate, both in the short and in the long term. Consistent with the literature, our results show that the rand/dollar exchange rate reacts to fundamental variables only in the long term. Unlike Meese and Rogoff (1983), who postulate that the best way to estimate the exchange rate over the short-term is with a random walk model, our study shows that we can exploit information from the microstructure approach to explain short-term dynamics in the rand.

Series title: Research Brief 183
1 April 2019
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