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
‘Flash Crush’ Monday
On Monday, the South African rand plunged to a record low as investors worried about the economy, while the Nigerian Naira sunk to a new all-time low on the black market after the central bank halted dollar sale to non-bank foreign exchange operators.
The two countries are Africa’s biggest economies and the drop in their currencies early in the year point to a tougher 2016.
2015 was a rough year for most sub-Saharan African currencies mainly due to a falling commodity prices on the international market due to a slowdown in the Chinese economy — the regions top trade partner –that left many countries struggling with rising inflation and depreciating local units.
African currency woes were further compounded by speculations over a possible interest rate hike by the US Fed in over nine years that made the dollar strengthen globally. The Fed eventually increased rates in December, strengthening the dollar even further.
With these external factors persisting into the new year, the rout on nearly all African currencies is expected to continue into 2016.
The drop in the rand on Monday, that is now being called the “flash crush”, was sparked by some Japanese banks liquidating their holdings in the South African currency.
“In the early hours of Monday morning during illiquid trading conditions, the ZAR weakened sharply (9%) to a new all-time low of 17.91/USD as yield-hungry Japanese retail investors decided to cut their ZAR positions,” a note from Barclays indicated.
But this should not be mistaken as the cause of the sell-off.
According to a Reuters report, global concerns about China’s economy added to investors worries over South Africa’s local political and economic strains ahead of municipal elections later this year fueled the collapse in the rand.
The South African Unit has since recovered some of its losses to trade in the 16.50-17.00 range.
Analysts however say sentiments still remain bearish against the rand and could see it fall again in coming weeks.
“Sentiment, already so poor, has been hit hard and it seems the rand will hold on to at least 3 percent losses,” John Cairns at Rand Merchant Bank in Johannesburg told PoundSterling Live.
Barclays are also pessimistic on the rand’s chances going forward:
“Although the ZAR has subsequently recovered some ground, sentiment remains extremely ZAR bearish. Over the coming days, if the language from this week’s Fed speakers causes US policy rate hike expectations to intensify even further, then we believe the ZAR is likely to continue falling to record lows.”
In Nigeria, while the naira has been stable at about 200 per dollar in the official market, the currency has depreciated to a record low of 282 to the greenback in the unofficial black market, pointing to a possible devaluation by the Central Bank Of Nigeria (CBN).
“This is a huge hemorrhage on our scarce foreign exchange reserves, and cannot continue,” CBN governor Godwin Emefiele told a news conference in the capital Abuja.
Accelerating currency declines across sub-Saharan Africa has started to filter through nations economies, especially in countries like Zambia, Angola, South Africa and Nigeria that rely to minerals and oil export to China for revenue.
“It’s a watershed moment for Africa,” Mike Keenan, a regional currency analyst for Barclays PLC in Johannesburg, told The Wall Street Journal.
“In South Africa, we’ve reached a fork in the road. If the government goes down the populist route, we will see more depreciation, but if it decides to tighten the rand, we could still see a turnaround.”