CROSS-BORDER FLOWS
BRIAN KANTOR: Exchange-rate volatility is a global issue
The best approach central banks should adopt to exchange rate shocks is to ignore them
SA is very open to international trade. Annually, the value of imports and exports is equal to 50% of GDP. Yet all this trade across borders is subject to highly volatile exchange rates, which add considerable risks to exporters, importers and those who compete with imported goods in the local market. Operating margins depend on exchange rates adjusted for differences in inflation between trading partners — known as real exchange rates. An undervalued currency will add to profit margins, and an overvalued one — should the exchange rate change by less than the differences in inflation with trading partners — will depress margins. Changes in nominal exchange rates are, however, the predominant force behind changes in the real exchange rate. In SA and elsewhere, frequent shocks to the exchange rates lead and inflation rates follow. SA’s experience with real exchange rate volatility is by no means unique. The trade-weighted real dollar exchange rate has been even more variable than the ...
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