Foreign exchange developments and the minerals industry

This paper analyses the reaction of the minerals industry to foreign exchange developments in South Africa. This is achieved by augmenting a Taylor rule type central bank monetary policy reaction function with the foreign exchange rate. The results provide evidence that, following an a percentage point increase in foreign exchange rate, output of the minerals industry decreases and bottoms out after 3 months. The results further show that the effect of an increase in foreign exchange rate on output of minerals industry is statistically significant up to 5 months. The results are consistent with the dominant currency pricing paradigm, with the U.S. dollar being the most dominant currency, hence appreciation of the dollar against other currencies predicts a decline in the volume of trade between these countries. Most currencies, including the rand, follow a freely floating exchange rate regime with little direct or indirect intervention for the purpose of influencing their exchange rates. As a result, the exporters and importers could use the available strategies and financial instruments to manage the exchange rate risk and to minimise the adverse