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CFA Franc reform edges closer

CFA Franc reform edges closer

The introduction of West Africa’s common currency, the Eco, potentially took a step closer following press reports that France is preparing to return €5bn of foreign exchange reserves to the Banque Centrale des Etats de l’Afrique de l’Ouest as part of a guarantee agreement on the reform of the CFA Franc. While the reform was partly to mark a break with the past, France will retain a strategic position within the West African Economic and Monetary Union, such as obtaining regular information on the zone’s financial transactions with the outside world.

Naira slides as ‘Naira 4 Dollar’ extended

The Naira dropped to 411.25 on the NAFEX window from 410.33 the previous week after the Central Bank of Nigeria extended its ‘Naira 4 Dollar’ scheme indefinitely. The bank’s move is aimed at sustaining the country’s foreign exchange market liquidity by seizing on diaspora remittances, which are forecast to rise 5% to $22 billion by the end of the year. Under the scheme, all recipients of diaspora remittances through approved IMTOs and commercial banks receive an additional 5 Naira for every dollar. Meanwhile, to discourage appetite for dollars, the central bank has ordered local banks to halve dollar-cash deposit allowances to $5,000 from $10,000 a month. While the Naira was stable in the parallel market at 481 to the dollar and we expect it to maintain these levels, we anticipate slight weakening towards 420 to the dollar on the NAFEX window as the Naira 4 Dollar extension amounts to a limited technical devaluation.

COVID recovery taxes weigh on Cedi

The Cedi weakened to 5.7650 against the dollar this week from 5.7400 following the introduction of a series of taxes designed to revive the country’s economy, which was hard hit by the coronavirus pandemic. The Ghana Revenue Authority said it doesn’t expect Ghanaians to feel the impact of the new 1% COVID-19 health recovery levy, which was rolled out along with four other new taxes at the start of the month. The GRA further assured Ghanaians that the new COVID-19 levy shouldn’t have any significant impact on the cost of goods and services in the country. We expect the Cedi to weaken further towards 5.7850 as the nation’s economy reacts to the effects of the new taxes.

Rand bounces to 16-month high 

The Rand rose to 14.00 against the dollar—its highest level since January 2020—buoyed by a combination of the US Federal Reserve’s continued ultra-accommodative monetary policy and improvements in the local political environment following the suspension of Secretary General Ace Magashule—who has been charged with corruption and other crimes. The Rand was also boosted by Moody’s decision to keep the country’s credit rating unchanged and dollar weakness due to April’s lacklustre job numbers, which caught market participants off-guard. We expect the Rand to remain steady at around 14-14.05 to the dollar in the coming week amid more expected inflows from foreign investors.

Eid holiday slows Egypt’s economy

The Pound edged lower to 15.67 from 15.62 at last week’s close with economic activity slowing as the country enters its five-day Eid al-Fitr holiday period. Standard & Poor’s left Egypt’s credit rating unchanged at B, maintaining its stable outlook in part because financial reforms and robust macroeconomic conditions have supported higher growth rates and allowed foreign exchange reserves to build up. To offset the impact of the ongoing pandemic, the Tourism and Civil Aviation ministry extended its programme to support domestic tourism until the end of the month, keeping airfares fixed and allowing for hotel occupation at 50% capacity. We expect the Pound to fall to around 5.7 amid the Eid holiday.

Foreign exchange inflows boost Kenyan Shilling

The Shilling rose against the dollar this week, trading between 106.75 and 107.5, having briefly hit 105.87 on Sunday. The stronger Shilling was supported by agricultural exports and loan disbursements in the country, as well as foreign exchange inflows from diaspora remittances. Foreign currency reserves fell to $7.6 billion from just under $7.7 billion last week, still adequate at 4.63 months of import cover. We expect the Shilling to steady in the coming week as we foresee reduced dollar demand from importers being matched by inflows from agricultural exports, particularly in the horticulture sector.

Coffee exports prop up Ugandan Shilling

The Shilling strengthened against the dollar, rising to 3533/3548 from 3550/3560 last week, juiced by inflows from offshore investors, NGOs and coffee export receipts. President Yoweri Museveni was sworn in for his sixth term on Wednesday after January’s elections. We expect the Shilling to be supported by continued dollar inflows from agricultural exports such as coffee.

Tanzania seeks to improve Kenyan trade relations

The Shilling remained steady at 2310/2324 to the dollar after Tanzania’s new president Samia Suluhu Hassan visited Kenya to promote better trade and investment relations between the two countries. Earlier this year, Kenya banned maize imports from Tanzania due to food safety concerns, causing tensions between the two East African neighbours to escalate. The UK’s Minister for Africa James Duddridge also visited Tanzania this week amid efforts to improve ties between the two countries following British criticism over the conduct of Tanzania’s recent election. We expect the currency to remain stable, supported by a 35 billion Shilling ($15 million) development loan from China.

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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.

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