Q4'21 FX Outlook - Getting set for the aversion ahead
African currencies have survived thus far on a rebound in exports, a surge in remittances, an ultra-dovish global environment, and fresh Special Drawing Rights (SDR) allocations. The current quarter could be a litmus test for these currencies, as global macro fundamentals evolve. These currencies will have to cope with the seasonal surge in import demand, higher oil prices and monetary policy normalization in advanced economies amid rising COVID-19 caseloads.
During the past quarter, petrocurrencies under our coverage fared better than their peers. While rising oil prices and interventions by apex banks drove the outperformance, both Angola and Nigeria have been unable to benefit from OPEC+ easing measures due to operational deficiencies. Meanwhile, surging import demand from manufacturers and higher oil prices are mounting pressure on the Kenyan Shilling. The weakness in the Rand can be linked to risk-off sentiments towards currencies in emerging markets over taper talks, the Evergrande debt crisis, and its social and fiscal sustainability issues.
The final quarter of the year could be a litmus test for SSA currencies, due to the recent developments on the global scene. To begin with, monetary policy normalization in advanced economies has elevated risk aversion towards emerging-market assets. While the Fed has delayed its tapering decision until November, the risk of a deeper EM sell-off still looms over SSA currencies as US treasury yields rise. In addition, recent power outages in China, a major trade partner of most of these economies, could lead to output shortages and higher prices amid the seasonal demand surge associated with year-end festivities. Finally, the surge in oil prices beyond $80/barrel could inflate the petroleum import bills of non-oil exporters (Kenya and South Africa) and yield weaker currencies. While higher oil prices should bode well for the Nigerian Naira and Angolan Kwanza, a slump in oil production could prevent both currencies from maximizing returns from the oil rally.
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