Analysing the Exchange Rate Volatility Relative to Trade Balance: The Case of SACU Countries

The term exchange rate volatility is widely used in the financial market. The exchange rate is determined in the foreign exchange market, which is said to be the largest market in the world and it trades in financial assets. The main focus of this study is to analyse the nature of the relationship between exchange rate and trade balance in the selected member states of the SACU region in which the selected countries are Botswana, Namibia, Swaziland and South Africa. This study uses time series data from the period of 1986 to 2016. The Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model, the impulse response functions and variance decompositions are used in the analysis. Results show that there is a short-run relationship between exchange rate volatility and trade balance. It was found that there is a positive and negative impact between these two variables, with high volatility. Furthermore, this study recommends all Central Banks in the SACU region to intervene in order to mitigate exchange rate volatility.