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The High-Frequency Response of the Rand-Dollar Rate to Inflation Surprises

Author

Listed:
  • Greg Farrell

    (South African Reserve Bank and Wits University)

  • Shakill Hassan

    (South African Reserve Bank and University of Cape Town)

  • Nicola Viegi

    (Department of Economics, University of Pretoria)

Abstract

We examine the high-frequency response of the rand-dollar nominal rate within ten-minute intervals around five minutes before, five minutes after) official inflation announcements, and show that the rand appreciates (respectively, depreciates) on impact when inflation is higher (respectively, lower) than expected. The effect only applies after the adoption of inflation targeting, and is stronger for good news. Our findings are rationalisable by the belief, among market participants, in a credible (though perhaps not particularly aggressive) inflation targeting policy in South Africa; and can be used to monitor changes in currency market perceptions about the monetary policy regime.

Suggested Citation

  • Greg Farrell & Shakill Hassan & Nicola Viegi, 2012. "The High-Frequency Response of the Rand-Dollar Rate to Inflation Surprises," Working Papers 201215, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201215
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    Citations

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    Cited by:

    1. Stan Du Plessis & Monique Brigitte Reid, 2015. "The Exchange Rate Dimension of Inflation Targeting: Target Levels and Currency Volatility," South African Journal of Economics, Economic Society of South Africa, vol. 83(2), pages 174-179, June.
    2. Cyril May & Greg Farrell & Jannie Rossouw, 2018. "Do Monetary Policy Announcements Affect Exchange Rate Returns and Volatility of Returns? Some Evidence from High‐Frequency Intra‐Day South African Data," South African Journal of Economics, Economic Society of South Africa, vol. 86(3), pages 308-338, September.
    3. Matthew Greenwood-Nimmo & Daan Steenkamp & Rossouw van Jaarsveld, 2021. "Risk and Return Spillovers in a Global Model of the Foreign Exchange Network," Working Papers 11014, South African Reserve Bank.
    4. Nasha Maveé & Mr. Roberto Perrelli & Mr. Axel Schimmelpfennig, 2016. "Surprise, Surprise: What Drives the Rand / U.S. Dollar Exchange Rate Volatility?," IMF Working Papers 2016/205, International Monetary Fund.
    5. Pacheco, André Sanchez, 2023. "Inflation surprises across developed and emerging economies," Textos para discussão 566, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    6. Xolani Sibande, 2023. "Monetary policy and herding behaviour in the ZAR market," Working Papers 11053, South African Reserve Bank.

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    More about this item

    Keywords

    High-frequency exchange rates; inflation surprises; Taylor rules; inflation targeting; credibility;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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