FX Week Ahead: Cedi pressure to be eased by central bank FX support

FX Week Ahead: Cedi pressure to be eased by central bank FX support

Cedi pressure to be eased by central bank FX support
The Cedi depreciated slightly against the dollar this week to 6.107 from 6.103 at last week’s close, having briefly strengthened to 6.085. The renewed pressure comes amid concerns about rising inflation, which has been caused by consumer preference for imported goods. We expect the Cedi to remain under pressure over the coming week, though the Bank of Ghana’s forward FX auctions should help keep the currency trading around the 6.1 level.

Africa awaits COP26 commitments 
Amidst global pledges to end deforestation, reduce methane emissions and phase out coal, Africa awaits specific action from COP26 to mitigate risks in the world’s most vulnerable region. African leaders have called attention to the impact already being felt of unpredictable rainfall alongside multiple further consequences of rising temperatures and sea levels.

Kenyan President Uhuru Kenyatta this week warned that climate change could cause African GDP to contract 30% by 2050. Wealthy nations’ promises to provide $100bn a year in climate finance to developing nations to mitigate the impacts of climate change have yet to be honoured. All eyes are on the last week of COP26.

Naira outlook improves with ‘100 for 100 Policy’
The Naira strengthened against the dollar this week, appreciating to 565 from 571 at last week’s close amid thinning demand for the greenback. Meantime, the recent build up in the central bank’s FX reserves has run out of steam after the 30-day moving average benchmark dropped to $41.8bn, a decline of roughly $38m.

The central bank also outlined criteria for its ‘100 for 100 Policy on Production and Productivity’ programme that will provide FX to projects that have the potential to boost economic growth and job creation. The criteria state that 50% of raw materials must be sourced locally and 80% of jobs created must be for Nigerians. We expect the Naira to continue strengthening as dollar supply bumps up against weak demand.

Fed tapering to weigh on Rand 
The Rand weakened to its lowest level since March this week, depreciating to 15.48 from 15.23 at last week’s close following a big jump in domestic fuel prices. That squeeze on living costs has dented investor confidence ahead of the festive season, with the US Federal Reserve’s plans to start tapering its economic stimulus programme later this month further knocking sentiment.

While the Fed has said its plan to reduce bond purchases is not a signal that rate rises are imminent, potentially offering some respite for the Rand, we expect the Rand to remain under pressure short term.

Egyptian Pound steady as FX reserves rise
The Pound was unchanged against the dollar this week, trading at 15.70/15.76. The central bank said its net foreign reserves increased to $40.8bn at the end of October, an increase of about $29m. Those reserves have helped the economy remain stable and cover Egypt’s FX market needs.

The US this week announced that it would grant Egypt $125m through its USAID unit to support economic development in the country. Against that backdrop, we expect a stable Pound over the coming seven days.

Kenyan Shilling weakness expected to persist 
The Shilling continued to lose ground against the dollar, depreciating to 111.80/112.20 from 111.0/111.20 at last week’s close amid increased demand for the greenback. Falling consumer prices prevented a sharper decline, with inflation edging lower to 6.5% in October from 6.9% the previous month.

Kenya’s FX reserves fell slightly to just under $9.2bn from a little above that a week earlier, though still adequate for 5.61 months of import cover. We expect to see more pressure for the Shilling over the coming week.

Coffee exports to keep Ugandan Shilling steady
The Shilling held firm against the dollar this week, trading at 3550/3560, with coffee exports and remittance inflows matching corporate demand for the greenback. Uganda is now ranked the second largest coffee supplier to Italy, which is Europe’s second largest importer of green coffee beans. We expect the Shilling to remain stable over the next seven days.

Tanzanian Shilling set for further gains
The Shilling strengthened against the dollar, appreciating to 2296/2306 from 2300/2310 at last week’s close amid broader optimism for Tanzania’s economic prospects as it recovers from the impacts of the coronavirus pandemic.

The African Development Bank said it expects the country’s GDP to grow 2.8% this year before expanding 4.9% and 6.3% in 2022 and 2023 respectively. The World Bank is also expected to provide more funds to finance development projects related to education and infrastructure.

We expect the Shilling to remain supported over the coming week, underpinned by agricultural exports such as cotton and tobacco and investor inflows following its oversubscribed 15-year treasury bond auction last week.

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