FOREX Africa: Investors Keenly Watch African Central Bankers’ Rate Play

FOREX Africa: Investors Keenly Watch African Central Bankers’ Rate Play

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.

Lucky or Unlucky

As widely predicted 2015 is turning out to be a tough year for African currency and investors are on their edges trying to avoid foreign exchange losses or to gain from the fluctuations.

On the other hand, policymakers and central bankers across the continent are in a catch-22 position as their local currencies depreciate against a globally stronger dollar.

For many central bank governors on the continent tightening liquidity on the money markets by raising interest rates and using other monetary tools at their disposal seem like the only best option they have in the short term.

Already banking regulators in Kenya, South Africa, Nigeria, Tanzania, Uganda and Ghana have hiked their benchmark interest rates to stem their local currencies from hemorrhaging  further against the greenback, with some level of success for a few.

In Ghana, the cedi has surged 27 percent against the US dollar since the beginning of July, the biggest gain on any currency in the world over the period, reversing all of its losses so far this year.

While this gain was mainly due to a $918 million International Monetary Fund (IMF) loan program being approved, the country’s central bank had also raised its benchmark interest rate to 22 percent where it held it in a rate-setting meeting earlier this month.

The west African nation will receive its second tranche of the IMF facility worth $115 million in August ahead of a planned Eurobond offer scheduled for September.

The country is also expected to get a $1.8 billion hard cash injection after the Parliament Wednesday approved a loan agreement between the Ghana Cocoa Board (COCOBOD) and a consortium of international and local banks for the purchase of cocoa beans for the 2015/ 2016 crop season, Graphic Online reported.

But not all countries have been as lucky as Ghana.

In Kenya, the Monetary Policy Committee has already hiked the country’s key lending rate twice since June to 11.50 percent and instituted currency trading limits on commercial banks, but this has had little support for the shilling.

Analysts expect the Kenyan shilling, which has already depreciated nearly 10 percent so far this year to trade at 102 shillings per dollar, to keep falling and is seen closing the year at 110 per dollar — a new all-time low. It last reached 107 to the greenback on Oct. 2011.

Kenya’s new central bank governor, Patrick Njoroge, told a Senate committee on Finance on Monday that policymakers had little control of the shilling’s movement in a free floating market and cannot stop it from depreciating further if fundamentals are skewed against it.

“We are cautiously optimistic. I use this deliberately because we have brought down volatility in exchange rate,” Njoroge told the committee. “We definitely want to be sure that if there is any movement, it is smooth and gradual.”

Last week the South African rand, which has hovered at a thirteen-and-half-year low for a while, fell to a 14-year low against the dollar. The country is the most exposed African nation to global trend due to its direct trade linkages with the US, European countries and Asian economic giants China and India.

South Africa’s Reserve Bank last week raised its key interest by a quarter of a percentage point to six percent in line with economists’ expectations.

Last year the bank had hiked the rate twice but was limited from raising it further to protect the rand as the local economy was slowing down as the continent’s second largest economy struggles with high unemployment rate and a power supply crisis in the face of adverse external factors.