AfkInsider Forex Africa Report: What To Expect For The Week Ahead

AfkInsider Forex Africa Report: What To Expect For The Week Ahead

As frontier markets, 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.

Starting in Zimbabwe, the electoral “victory” of long-time president Robert Mugabe has quashed rumors making rounds around the trading pits that his country would reintroduce Zimdollars – the doomed Zimbabwean currency that was wiped out by hyperinflation and abandoned in 2009 with the legalization of the use of foreign currency for all financial transactions in that country. For now, it seems, Mugabe – and the use of foreign currency in day-to-day transactions – will remain a fact of life in Zimbabwe.

Meanwhile, in Kenya, the shilling has so far remained steady – trading at 87.50 per U.S. dollar – as Kenyan fiscal and monetary policy has kept the country’s money supply on a tight leash. This in turn has kept Kenyan interest rates at a relatively high 9.5 percent. In the long run the expectation is that government budgets will loosen up – thus increasing liquidity, but in the short run look to potential forex fallout from the massive fire at Nairobi’s international airport. The airport is a major international air-transport hub and a key point of egress for the export of goods from and the arrival of tourists to Kenya and East Africa. If flights do not resume soon expect major downward pressure on the shilling to develop.

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In next-door Uganda, dry weather has strained food supplies and raised inflation from 3.6 percent in June to 5.1 percent as of the end of July. This has in turn caused an increase in core inflation – which does not include highly volatile food and energy prices – of 0.6 percent, increasing the rate at which prices rise annually to 6.4 percent from 5.8 percent. The jump in prices has led to staple items such as the price of a liter of milk jumping nearly 25 percent. As a result, one can expect either a decline in the Ugandan Shilling / USD exchange rate – which had been on a secular increase since 2009 – or an increase in Ugandan interest rates in order to keep the shilling steady against the dollar.

In Tanzania, good weather, bumper crops, and strong agricultural exports have kept the Tanzanian currency relatively strong against the U.S. dollar. Indeed, it is expected to appreciate somewhat – potentially recouping some of the ground lost in 2011 when the Tanzanian shilling fell from a secular high against the dollar due to increased demand from Tanzania’s oil-importing, dollar-exporting sector.

Further west, in Nigeria, the central bank fueled rumors that it may devalue the naira as low oil prices and a marked reduction in the flow of foreign capital into Nigeria continue to put downward pressure on that country’s currency. This would mean the officially supported trading range of 155 +/- 3 naira to the dollar might increase to 160 +/- 3, potentially spurring inflation in the West African giant unless domestic interest rates rise to compensate. This latest move by the central bank comes after a bid to support the currency with a $500 million sale of USD failed to stem the naira’s weakness. One factor at work in weakening the Naira, aside from fear over Chinese growth prospects and Europe’s continuing crisis over the Euro, is the U.S. shale oil revolution, which has slackened American demand for Nigerian crude.

To the south, South Africa’s economic malaise has led to the rand taking a beating of late, falling to valuation levels against the U.S. dollar not seen since the depths of  global financial crisis in 2008. Since Africa’s largest economy is seen as not having the foreign currency reserves to defend against speculative attacks, it is likely the rand, already battered, could sink even lower going forward.

Elsewhere in Southern Africa the situation is not so bleak. In Mozambique, for instance, Fitch Ratings raised its valuation of that country’s debt to B+ from B due to Mozambique’s relatively low inflation and above-average growth prospects. This could put upward pressure on the country’s currency, the New Mozambican Metical, which has already risen 7 percent against the dollar since September.