AZA Finance FX Week Ahead: Rising inflation weighs on Cedi

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Rising inflation weighs on Cedi

The Cedi strengthened marginally against the dollar this week, trading at 7.035, recovering from a record low 7.060 at the end of last week. Inflation ticked higher in February to 15.7% from 13.9% in January as a result of rising food prices, exacerbated by Russia’s war in Ukraine.

Meantime, the Cedi has come under continued pressure from lower export inflows, as well as increased capital flight from foreign investors exiting the country’s local debt market. Against that backdrop, we expect further pressure on the Cedi in the coming week as liquidity remains tight.

African currencies net losers in oil spike

Russia’s war in Ukraine has sent oil skyrocketing to more than $130 a barrel—its highest price since the global financial crisis.

Elevated oil prices alongside limits on Russian oil exports are likely to benefit African crude producers including Algeria, Angola, Nigeria, Libya and Sudan. However, even for leading oil producers such as Nigeria, the picture is more complex.

Nigeria exports crude oil but imports the refined product for fuel, creating higher import prices that risk accelerating inflation.

While revenue from crude exports may give some support to local currencies, the cost of importing refined petroleum is likely to put pressure on Africa’s FX markets in the near term, with the biggest net importers—such as Kenya—suffering the most.

Naira unmoved by 14-year high oil 
The Naira appreciated slightly against the dollar, easing back from a record low of 580 to trade at 578 on the unofficial market. While surging crude prices are a positive for Nigeria’s FX inflows, those higher prices are also causing pain at the pumps, with the cost of unregulated diesel rising about 160% to NGN570 from NGN240 a year ago.

That has prompted the Manufacturing Association of Nigeria to warn of looming inflation from the potential trickledown effect of higher diesel prices on goods and services. Since the Central Bank of Nigeria stopped FX sales to the country’s Bureau de Change outlets last July, the potential uplift from higher crude export revenue on CBN reserves no longer feeds through to the unofficial rate, which is now solely a reflection of dollar demand and supply.

For these reasons, we don’t expect to see significant strengthening in the unofficial market rate even if oil prices remain elevated.

Fed rate rise prospects dampen Rand outlook
The Rand appreciated against the dollar this week, strengthening to 14.99 from 15.36 at last week’s close, supported by higher commodity prices and as the country’s economy expanded at the fastest pace in 14 years. South African GDP grew by 4.9% in 2021—though the economy remains well below pre-Covid levels after a 6.4% contraction in 2020.

Further Rand gains were curtailed by concern over the impact of Russia’s war in Ukraine on the global economy, as well as domestic power shortages and expectations that the US Federal Reserve will start raising rates as early as next week. The Fed’s policies are likely to put pressure on the Rand in the near term.

Egypt Pound eases from 7-month high on wheat price 
The Pound weakened slightly against the dollar this week, trading at 15.7 after briefly hitting 15.68 at the end of last week, its strongest level in seven months. The price of wheat-based flour increased by 37% this week, rising to EGP12,300 per ton from EGP900 a week earlier as Russia’s war in Ukraine disrupted global wheat supplies.

Egypt is expected to receive a shipment of wheat this month from Russia, which was contracted before the country invaded Ukraine. Egyptian Cabinet spokesperson Nadder Saad said its strategic commodity reserves, which are thought to be sufficient to cover six months of supply, will enable the country to keep the retail price of wheat and meat at reasonable levels.

We expect the Pound to remain around the 15.7 level as the country maintains its appeal to foreign investors.

Shilling hits new low as oil feeds Kenya inflation
The Shilling weakened to a fresh record low against the dollar, trading at 114.15/114.75 from 113.9 at last week’s close amid the surge in global oil prices. The weaker currency is creating inflationary pressures, pushing up the cost of imports and raising debt servicing concerns.

Inflation is expected to average around 6% this year, though that could potentially creep higher if a lack of rain during the wet season crimps food production. Kenya’s FX reserves declined to $7.9bn from $8.1bn a week earlier, enough for 4.84 months of import cover.

We expect the Shilling to remain under pressure in the week ahead, though the central bank is likely to dip into those reserves to avoid a steeper decline.

Gold export freeze weakens Ugandan Shilling 
The Shilling weakened to 3615/3630 this week from 3540/3550 at last week’s close as dollar demand from importers outpaced inflows from commodity exporters. Despite soaring gold prices, Uganda’s gold producers have been halting exports to negotiate fresh terms after the government imposed new levies on exports at the beginning of this financial year. Against this backdrop, we expect to see more pressure on the Shilling in the near term.

Rising oil and food prices pressure Tanzanian Shilling 
The Shilling weakened marginally against the dollar this week, trading at 2311/2321 from 2310/2320 at last week’s close. Russia’s war in Ukraine has impacted Tanzania’s imports of wheat and other cereals, which are mainly sourced from those two countries.

The rise in global oil prices and strains on wheat supply will likely lead to an increase in food prices and higher inflation this month. Inflation had eased in February to 3.7% from 4% in January, according to Tanzania’s National Bureau of Statistics.

Given the inflationary pressures, we expect to see more pressure on the Shilling over the coming weeks.

Note to journalists: please feel free to quote from this briefing for news reports and let us know any requests for further comment or interviews via the contact details at the end, or by reply to this email. AZA is Africa’s largest non-bank currency broker by trading volume at over $1 billion annually. See 

Issued by AZA. This Newsletter is produced as a service to our clients. It is prepared by our dealing professionals and is based on their understanding and interpretation of market events. AZA cannot be held responsible for any losses of whatever nature sustained as a result of action taken based on comments contained in this publication.

For more information, high-resolution charts or interviews, please contact:

Gavin Serkin
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