Understanding Foreign Exchange Markets – Connecting South Africa to the Global Economy

Admin
Jul 27, 2025
2 min read

Dear Grade 12s

Have you ever wondered how we buy goods from other countries, or why the value of the rand changes?

Then you’re already thinking about foreign exchange.

This topic is one of the most real-world parts of Economics.

It affects how we travel, trade, invest, and even how much we pay for fuel and groceries.

Let's unpack it step by step so you can understand it with confidence — and ace it in your final exam!

🌍 What is the Foreign Exchange Market?

The foreign exchange market (also known as the forex market) is where currencies are bought and sold.

It allows:

South Africans to buy goods from other countries
Foreigners to invest or do business in South Africa
Travellers to exchange rands for dollars, euros, or other currencies

✅ It’s a global market that runs 24/7, and the value of a currency is called the exchange rate.

💸 Key Concepts You Need to Know

1️⃣ Exchange Rate

The price of one currency in terms of another.

For example:

If R1 = $0.055 → the rand is weaker than the US dollar
If $1 = R18.18 → it means you need R18.18 to buy 1 dollar

Types of exchange rates:

Nominal – the actual rate used for buying/selling currencies
Real – nominal rate adjusted for inflation

2️⃣ Appreciation vs Depreciation

Appreciation: When the rand increases in value→ Imports become cheaper, exports more expensive
Depreciation: When the rand loses value→ Imports become more expensive, exports more competitive

🧠 Remember:

Strong rand = good for importers
Weak rand = good for exporters

3️⃣ Demand and Supply of Currency

Foreign exchange is affected by:

Demand for exports and imports
Tourism (foreigners bring in currency)
Foreign investment (money flowing in or out of SA)

✅ When demand for SA goods increases → demand for rands increases → rand appreciates

✅ When we import more → we need more foreign currency → rand depreciates

4️⃣ Exchange Rate Systems

There are 3 types:

Fixed exchange rate – set and controlled by government
Floating exchange rate – set by market demand and supply
Managed floating – mostly market-determined but sometimes influenced by the central bank

South Africa uses a managed floating system.

5️⃣ The Role of SARB

The South African Reserve Bank:

Buys/sells foreign currency to stabilise the rand
Monitors and controls inflation
Sets the repo rate, which can influence exchange rates

📘 Exam Tips:

✅ Learn key definitions clearly (e.g., exchange rate, appreciation)

✅ Use real examples when answering long questions

✅ Always explain the impact of currency changes (on consumers, exporters, etc.)

✅ Practise data-response questions (graphs, exchange rate tables)

✅ Understand the advantages/disadvantages of strong vs weak currency

🌍 Why It Matters

Foreign exchange affects:

Fuel prices
Imported goods like electronics and clothes
Exporters and tourism
Our entire economy and inflation rate

This topic is about understanding how SA connects with the world — through trade, travel, and global markets.