Impact of Macroeconomic Announcements on Foreign Exchange Volatility: Evidence from South Africa

This study focuses on scheduled macroeconomic news announcements and evaluates their impact on the volatility of the South African rand (ZAR) and US dollar (USD) exchange rate using high frequency data. The following asymmetries are studied: news items by geographical location, no‐news vs. surprise news announcements and positive vs. negative news announcements. We make the following findings in our empirical study: (i) After the release of a news announcement, the level of foreign exchange volatility rises. This is independent of whether the news item surprised the market or not. (ii) Both South African and US news items significantly impact USD/ZAR volatility, suggesting that the news items are being used to formulate investor expectations regarding the future prospects of the currency pair. (iii) Negative news appears to have a greater impact on exchange rate volatility relative to positive news. This result is also state dependent, as investors tend to behave differently to news depending on the economic climate at that point in time. Investor cognitive biases give rise to the asymmetric news effects on exchange rate volatility. Finally, investors do not always act in rational manner, especially when faced with multiple news items that are contradictory to each other.