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FOREX Africa: Stock Markets Suffer As Currencies Fall To Record Low

FOREX Africa: Stock Markets Suffer As Currencies Fall To Record Low

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.

The selloff

African currencies are in the throes of a selloff that has seen a number of units hit their record low against a globally stronger US dollar.

In the last one month, South Africa, Malawi, Uganda and Zambia have seen their local currencies fall to new all-time lows. Other currencies on the continent including Nigeria and Kenya, have fallen to new lows against the dollar.

According to a Reuters report, faltering currencies have pushed the stock markets tracked on the MSCI Africa index 20 percent lower so far this year and could wipe out a four-year winning streak that had attracted foreign investors.

“Probably no African frontier market will recover enough to wipe out losses by the end of this year. Individual stocks might but markets as a whole will not,” Godfrey Mwanza, head of Pan-Africa Listed Equities fund at Barclays Africa’s asset management arm in Johannesburg, told Reuters.

Central bankers across Africa have been struggling to stop their currencies from hemorrhaging further by rising interest rates and introducing tougher foreign exchange trading rules.

This has worked in some cases like in Ghana and Nigeria, But for most countries the fall as persisted as commodity prices remain low and a potential economic slowdown in China, Africa’s largest trading partner, send shock waves across the globe.

This pressure on currencies has made it hard for foreign investors to exit their position in local equities at a profit and has discouraged new capital inflow into the local equities, despite the fact that the recent stocks rout has placed many counters at an overbought position.

A snap check of how major African currencies have performed this year shows; the South African rand had fallen 12 percent to a record low of 14 per dollar, The Nigerian naira is down 20 percent to an all-time low of 206, while the Kenyan shilling is plummeted 17.5 percent so far this year to a near record low of 107.

Other currencies that has fallen significantly include the Malawi and the Zambian Kwacha

‘Hot Money’

The bleeding on African currencies and stocks is far from over as the ‘hot money’ the continent’s capital markets had got used to in the last few years is likely to dry up if the US Fed raises interest rates this month as widely expected.

The world’s most influential central bank must decide whether to raise interest rates at its Sept. 16-17 meeting for the first time in nearly a decade, which has investors around the world on edge.

A rate hike by the Federal Reserve would likely lead to a stronger U.S. dollar, which could threaten emerging markets such as South Africa, according to Quartz.

Neville Mandimika, the African macroeconomic equity strategist at Atria Africa, said in a Blog that stock markets in Kenya, Nigeria and Zimbabwe, which benefitted from these hot money, are likely to become volatile from September if the Fed raises rates.

“Over 50% of the turnover in these markets is attributed to foreign institutional investors from Europe and the US which means they are very sensitive to the actions of the Fed,” Mandimika said in a Financial Times blog.

Already, the Nairobi Securities Exchange main share index has fallen about 20 percent so far this year  in dollar terms to tough a two-and-half-year low.

While Kenyan shares have recovered somewhat in the last week, Aly Khan Satchu, an independent analysts at Nairobi-based Rich Management, warned that the index would fall further this year if emerging market funds suffered outflows on the back of the Fed rate raise.

“If they continue to see redemptions, then Kenya will get hit straight away,” Satchu told Reuters.