With global equity markets pushing through key technical levels and international investor confidence rising, certain sub-Saharan African (SSA) currencies have caught my eye. Aside from tentative improvements in macroeconomic fundamentals, many currencies offer high interest rates, which are likely to attract capital inflows on the back of increasing global risk appetite. Perhaps more importantly, several units show very bullish technical patterns – in particular ‘head-and-shoulder’ formations – which point towards further strength over the coming months. I am not fully convinced yet, though. I will be keeping a close watch on technical formations: any significant retracements could put an end to my bullish views.

First up, the Kenyan shilling looks interesting. It has been range trading around KES77.00/US$ of late, but I believe it could soon break above key resistance at KES76.00/US$, setting up further gains, potentially as far as KES70.00/US$. The technical picture is promising, with trendline support having held since March. The Kenyan shilling is well-positioned to make gains if a further wave of international risk appetite emerges, since it is one of the most accessible SSA currencies, and foreign investors tend to use the Kenyan market (especially Kenyan equities) as a way to ‘play’ the region. The benchmark interest rate stands at 7.75%, and the 91-day T-Bill is currently yielding 7.26%, offering attractive carry.

On the fundamental front, a key development which may be in store is the announcement of concrete plans to establish a special court to try the alleged perpetrators of the 2008 post-election violence. Such news could boost investor confidence by signaling that the government is seeking to end the culture of impunity. For now, I will be watching the KES76.00/US$ level – a firm break through it to the upside would likely give me cause to initiate a bullish stance on the shilling.

Secondly, the Mauritian rupee looks poised for gains, with a potential head-and-shoulders pattern forming. From a fundamental perspective, imports are falling, which should alleviate downside pressure on the currency. The growth outlook has also improved lately, with my colleagues at Business Monitor International (BMI) now forecasting real GDP growth of 2.4% in 2009, compared with a previous forecast for a 0.5% contraction.

I also like the look of the South African rand. Aside from further gains in commodity prices, potentially greater inflows into South African capital markets – in particular equities – will support the currency during the second half of the year. With interest rates currently standing at 7.50%, the rand also offers attractive carry. BMI recently revised up its end-09 target to ZAR8.1000/US$, from ZAR9.5000/US$ previously. Looking at the long-term technical chart, I believe the rand even has the potential to appreciate towards the ZAR7.0000/US$ over the coming months, with a decisive break through the ZAR7.5000-7.6000/US$ area a precondition for further strength.

The above three currencies look particularly good, especially since they are some of the most liquid in SSA and are well-placed to attract hot money inflows. I will be watching a host of other African units too, though, paying special attention to high-yielders such as the Zambian kwacha and the Ugandan shilling.