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Q1'23 FX Outlook - Hanging between a black swan and a pivot

SSA Currencies: Hanging between a black swan and a pivot

African currencies were battered by the Russia-Ukraine war and rising global interest rates in 2022. For the second year running, the Angolan Kwanza outshined our coverage currencies. This can be linked to its oil-producing status. The reopening in China could provide further legroom for outperformance in 2023 as buoyant demand and elevated oil prices support the Angolan currency. While we still see room for broad-based depreciation, we note that a Fed pivot could bode well for these currencies, as hot money finds its way into emerging economies. While African central banks have raised interest rates to improve the carry trades, foreign investors could continue to watch from the side lines, awaiting a Fed pivot. Should no black swan event erupt during the course of the year, a deceleration in US’ inflation could pave way for gains in EM currencies (as the South African Rand).

SSA Currencies could weaken despite favourable global backdrop With the Black sea deal reducing the impact of the war on food supply chains and the fall in inflation slowing the pace of rate hikes, the outlook for 2023 is dependent on global macro factors. The trajectory of inflation in the United States will be a major driver of currency performance across emerging markets. While the US Fed voted to raise interest rates by 25bps at its first FOMC meeting of the year, we note that there is an increasing possibility of a Fed pivot should inflation fall closer to its target range. Nevertheless, we see increasing inflationary risks from the escalation of the Russia-Ukraine war. In the meantime, however, elevated sovereign yields on account of sustained hawkish monetary policy could keep countries out of the international debt market. Most African central banks under our coverage raised their benchmark interest rates in January – Nigeria (+100bps), Ghana (+100bps) and South Africa (+25bps). Kenya kept rates unchanged amid sustained decline in inflation and narrow negative real rate of return. Angola (-150bps) went against the tide to reduce interest rates amid rapid disinflation.