The impact of Monetary Policy Announcements and Political Events on the Exchange Rate: The Case of South Africa

Since 2000 the South African rand has been among the most volatile emerging market currencies, occasionally experiencing sharp depreciations. These sharp fluctuations in the value of the currency cannot be adequately explained by models of flow-supply and flow-demand of currency or by movements in fundamental factors, yet few studies have employed an asset pricing approach to explain exchange rate variability in emerging markets. To remedy this gap, we use an event study methodology to measure the impact of monetary policy announcements and political events on the exchange value of the South African rand. Using daily exchange rate data over the period March 1, 2000 to December 31, 2014, we find that the rand is highly responsive to both monetary policy announcements and political events. A total of 28 out of 43 monetary policy announcements displayed significant cumulative abnormal returns, while four political events, most notably the Marikana massacre, had significant impact on the rand.