African Currencies: Still Bullish
Regular readers of RiskWatchdog will recall that back in July, I flagged up the upside potential of several sub-Saharan African currencies. At that time, the units looked well-positioned to appreciate, thanks to rising global risk appetite, bullish technical patterns and the high yields on offer. I am pleased to say that this view has played out nicely: my ‘top picks’ have all since seen gains and what is more, the party is not over yet. Until and unless we see a significant resurgence in global risk aversion, I remain a sub-Saharan Africa FX bull.
The high-yielders have done particularly well. Back in late July, I selected the Zambian kwacha and the Ugandan shilling as ‘ones to watch’. Both have since flown on the back of rising risk appetite, having made gains of 9.3% and 9.2%, respectively.
The South African rand has also gained ground against the dollar. I liked this currency when it stood at ZAR7.7293/US$ in July, based on the potential for rising commodity prices, greater portfolio inflows into South Africa, and attractive carry. Buoyed by these factors, the rand has since appreciated by 3.4% and is now trading close to my ZAR7.2000/US$ short-term target.
South African rand, ZAR/US$
The Kenyan shilling has also seen significant gains – although it has taken some time to move. As I highlighted previously in this space, KES76.00/US$ was a key resistance level. With that hurdle now removed, the shilling has appreciated to KES74.75/US$ and KES73.00/US$ is now on the cards. I expect foreign investment into the fixed income market to lift this currency, given the high yields on offer.
Kenyan shilling, KES/US$
My third pick – the Mauritian rupee – looks good, too. The ‘head and shoulders’ reversal pattern has been completed with a breach of the neckline around MUR31.50/US$ setting up a move to my MUR28.50/US$ target. When it comes to Mauritian assets, my favourite has to be equities – the SEMDEX looks great right now.
Mauritian rupee, MUR/US$
September 22nd, 2009 at 2:27 pm
How is the appreciation of the euro against the US dollar affecting the countries of the West African and Central African CFA franc zones?
September 22nd, 2009 at 4:00 pm
I don’t think that the euro’s (and by implication the CFA franc’s) appreciation against the US dollar poses a significant problem at the present moment. For sure, further franc strength is likely to weigh on export revenues and governments’ fiscal incomes over the medium term. Yet, most countries in the West and Central African CFA franc zones will not experience a dramatic downturn in economic expansion in 2009 and therefore do not desperately depend on a weaker currency to boost growth. Furthermore, while inflationary pressures remain persistent in many other African markets, CFA franc zone members do not have to worry at all about high consumer prices, all thanks to euro strength. In my view, only a (unlikely) collapse in the US dollar and prolonged franc appreciation above the previous high of XOF400/US$ would cause serious economic problems in the region, and maybe raise renewed calls for a devaluation of the CFA franc.