Macroeconomic News 'Surprises' and the Rand/Dollar Exchange Rate

Abstract

Economic theory in the context of floating exchange rates has focussed on underlying medium and long term direction of exchange rate movements. Daily volatility is less well understood. One theory that offers an explanation for short term exchange rate movements is that of the efficient market hypothesis or EMH. Its application to the forex market allows exchange rate movements to be understood as the reaction of traders to relevant news. In an efficient market traders react to news and specifically to surprise news events which necessitate a re-evaluation of the currency value. We test for the validity of this hypothesis in the context of the daily rand/dollar forex market over a three year period, adding an emerging market case to the literature. We test the significance of macroeconomic news surprises -measured by the difference between actual and forecast data - in driving daily exchange rates. We find that surprises in both real and nominal variables cause a statistically significant reaction in the exchange rate. The results support an asymmetry between news of different origin as only surprises that originate in the U.S. prove significant. Good news also seems to receive greater attention from traders than bad news in our sample. Finally, we find that the statistical significance of variables is time-varying.