Which Currencies Are Most Vulnerable?

One of our clients, a pan-African investment bank, recently asked us which African currencies are most vulnerable at the moment. We judged the vulnerability using three-month forecasts against the US dollar. Here is the response we gave:

South African rand: The rand looks weak from a technical perspective. It is suffering amid bearish global investor sentiment towards emerging markets in general, and in particular those which have wide current account deficits that are funded by foreign portfolio flows - South Africa is a case in point. Over the coming months, we expect the 'hot money' flows into the bond market to wane as US treasury yields rise, sending the rand towards the psychologically important ZAR11.0000/US$ level and ZAR11.2500/US$ thereafter.

Botswana pula: The pula will continue on the depreciatory trend it has been in since the start of 2012, in line with the aims of the Bank of Botswana. A recent rate cut in December 2013 will aid in this.

Rand In Weakest Position
Africa - Forecast % Appreciation/Depreciation Against US$ Over Three Months

One of our clients, a pan-African investment bank, recently asked us which African currencies are most vulnerable at the moment. We judged the vulnerability using three-month forecasts against the US dollar. Here is the response we gave:

Rand In Weakest Position
Africa - Forecast % Appreciation/Depreciation Against US$ Over Three Months

South African rand: The rand looks weak from a technical perspective. It is suffering amid bearish global investor sentiment towards emerging markets in general, and in particular those which have wide current account deficits that are funded by foreign portfolio flows - South Africa is a case in point. Over the coming months, we expect the 'hot money' flows into the bond market to wane as US treasury yields rise, sending the rand towards the psychologically important ZAR11.0000/US$ level and ZAR11.2500/US$ thereafter.

Botswana pula: The pula will continue on the depreciatory trend it has been in since the start of 2012, in line with the aims of the Bank of Botswana. A recent rate cut in December 2013 will aid in this.

Malawian kwacha: Economic uncertainty and political risk stemming from the suspension of crucial foreign aid in September 2013 following a corruption scandal will weigh on the kwacha over the coming months.

Zambian kwacha: We expect broad stability for the kwacha with slight depreciatory bias. Pressures are very much to the downside however. The Bank of Zambia has limited foreign exchange reserves (US$2.7bn in November). Current account surpluses and strong FDI inflows do not provide the support expected due to significant 'other investment outflows'. The currency is therefore susceptible to slowdown/withdrawal of FDI amid policy risk.

Ghanaian cedi: Although the current account deficit has tentatively stabilised, it is nevertheless very wide and the retrenchment in the gold mining sector will not help matters. The wide budget deficit is also weighing on confidence. The upcoming opening up of the local debt market to foreigners for 2-year bonds will alleviate the pressure on the currency somewhat, but the overriding trend will be depreciation.

Rwandan franc: The franc will continue to weaken slightly due to high demand for foreign currency in order to pay for imports.

Nigerian naira: We expect the naira to remain broadly stable over the coming three months as the central bank has sufficient (albeit declining) resources (reserves of US$43.3bn in early January) to fend off depreciatory pressures. Over the longer term however, the currency is likely to come under pressure unless fundamental pressures shift.

CFA franc: We expect the peg to the euro to be maintained; a change to the peg is only likely in the event of a serious economic slowdown or a rapid appreciation of the euro. We are relatively neutral towards the euro at this point, believing that it will remain firm over the coming few months. That said, we are increasingly worried about recent figures that show eurozone inflation falling close to zero. Were the ECB to worry that the bloc is heading into deflation, it could respond in a way which would weaken the single currency. This would cause the two CFA francs to depreciate rapidly.

Tunisian dinar: This is a managed floating currency with a currency basket that is around 70% euro, 28% US dollar, 2% yen. Given a slight depreciation in the euro we'd expect to see very slight appreciation for the dinar. We see almost no risks that Tunisia or Morocco will have a devaluation - both have little balance of payments pressure which could cause a devaluation in the next three months. Tunisia is also receiving substantial foreign aid.

Moroccan dirham: This is a managed floating currency with a currency basket that is around 83% euro, 15% US dollar and the rest is mostly the Swiss Franc. Given a slight depreciation in the euro we'd expect to see very slight appreciation for the dinar. We see almost no risks that Tunisia or Morocco will have a devaluation - both have little balance of payments pressure which could cause a devaluation in the next three months.

Kenyan shilling: The shilling has been fluctuating recently, but seems to have found strong support at KES87.00/US$. Over the next few months we expect it to stay broadly within its current trend, but strengthen marginally.

Mauritian rupee: The Mauritian rupee will benefit from increased inflows of foreign capital as visitor numbers return to growth, but we do not expect it to surpass the key resistance level of MUR30.00/US$ over the next three months.

Ugandan shilling: Relatively tight monetary conditions and the effect of a continued lull in imports on the current account deficit augur for continued shilling stability with a mild appreciatory bias.

Egyptian pound: The currency has stabilised since the influx of foreign aid from the Gulf. Also we expect the improved political climate to entice tourists and investors back.

Tanzanian shilling: We expect broad sideways trade, but with mild appreciation. The current account deficit will be offset by inflows of FDI targeted at the nascent offshore gas sector.

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