Real Effective Exchange Rates Comovements, Common Factors and the South African Currency

Abstract

This paper analyses the comovement between the real effective exchange rate of South Africa and the weighted real effective exchange rates of Advanced, Emerging, Resource, Oil, African, BRIC and BIIT countries. The comovement is examined in the short term and long term as well as pre and post the recent global financial crisis. The results of the trend component show strong positive comovement of the real effective exchange rate of South Africa with the weighted real effective exchange rates of Advanced and BIIT countries and a strong negative comovement with Emerging, African and BRIC countries in full sample period. The results of the cycle component show strong positive comovement with the weighted real effective exchange rates of Resource, Oil and BIIT countries and a strong negative comovement with Emerging, African and BRIC countries. The positive and negative comovements with the groups of countries are sustained in the full sample period as well as the pre and post global financial crisis period with Advanced, Emerging, African and BRIC countries for both the weighted trend and cycle components. Finally, the real effective exchange rate of South Africa show comovement with the weighted cycle component of the all the groups of countries in the full sample period as well as pre and post global financial crisis while this is not the case with the weighted trend component.