Africa: FX Short-Term Gains To Fizzle Out
In line with my view of a renewed bounce in the US dollar (which is playing out really nicely, by the way), I believe that the recent gains of some sub-Saharan African currencies could be rather short-lived. Indeed, over at businessmonitor.com, I have been highlighting the potential for a rally in the Kenyan shilling, which traded at KES75.80/US$ at one point on December 19, having appreciated by 3.6% since I identified the potential for gains on December 11. While further short-gains could be on the cards, further strengthening of the greenback could spell weakness for the shilling, from its current level. My medium-term outlook remains bearish, as lower commodity earnings, subdued private investment and waning remittances are in the pipeline in 2009. As such, I believe that a weakening to KES84.00/US$ by end-09 is definitely within the realm of possibility.
In a similar fashion, the South African currency has looked increasingly strong on a technical basis over the past two weeks, and I pointed out the potential for a short-term appreciation towards ZAR9.4000/US$. Indeed, the unit has appreciated by 7.3% since December 10 to trade as high as ZAR9.4550/US$ on December 18, before retracing back to ZAR9.7100/US$ during today’s afternoon session. ZAR9.4000/US$ will remain a key resistance level going forward, and a push through it could set up further gains towards ZAR9.0000/US$ over the coming weeks. That said, a renewed rally in the US dollar is likely to remain the main obstacle to further strength in the short term. Furthermore, due to ongoing volatility in international markets and a potential slowing of investment inflows in light of weakening global and domestic growth, the rand’s upside potential will remain limited over the medium term, and I can see it weakening towards ZAR10.6000/US$ by the end of 2009.