Forex in Five: market updates on 14 February 2025

Developed Markets: Tariffs and Euro Volatility

The big global political story this week has been the tariffs introduced in the U.S., affecting major economies such as Canada, Mexico, and China. However, the most notable currency movement has been the Euro. Over the weekend, the Euro dropped from 1.04 to the low 1.02 levels—a significant two-figure decline. This suggests a potential future trend towards parity, or possibly even lower.

Interestingly, in the last couple of days, the Euro has rebounded, returning to pre-announcement levels. This pattern highlights the knee-jerk reactions in the market, with initial volatility followed by stabilization once traders digest the full impact of policy decisions. Moving forward, attention will likely shift to the Federal Reserve’s monetary policy. With recent rate hikes slowing, 2025 could see a period of stability unless inflation surprises force further action.

Emerging Markets: Nigeria, Kenya, and Central Africa in Focus

Nigeria: CBN’s Unexpected Dollar Moves

Nigeria has seen another wave of foreign investment similar to the trend observed in December. This influx of U.S. dollars into the official market caused a sharp 5% appreciation in the local currency, a much-needed boost. However, in a surprising move, the Central Bank of Nigeria (CBN) intervened by buying dollars at a lower rate. While this may have been an opportunity to strengthen reserves, it raises questions about their strategy, given the need to stabilize exchange rates. Whether this marks a trend or a one-off move remains to be seen, but the market will closely watch future CBN actions.

Kenya: Shift in Government Bond Strategy

In Kenya, the government announced a move away from short-term Treasury bills in favor of longer-term local bonds. While the rationale behind this decision is unclear, it may impact investors looking for short-term gains or those speculating on Kenyan shilling appreciation. The government is also pushing fiscal reforms more aggressively than in the past, trying to win public support for new tax measures. Unlike in 2024, when similar reforms sparked backlash, this time the approach appears more calculated and aligned with public sentiment. So far, the strategy seems effective, as evidenced by the IMF’s announcement of a significant disbursement expected in April 2025. With the Kenyan market remaining highly liquid and the exchange rate stabilizing around 110-130, this influx of funds is unlikely to disrupt the current equilibrium.

Central Africa

The euro-dollar move from 112 to 103 clearly has had some effect on XAF and XOF. But for the time being, any future volatility in Euro, unless it drops below parity, probably won't have too much of an effect on the fundamental price of XAF and XOF across Central Africa.

Conclusion

This week's market movements highlight the interplay between political decisions, central bank interventions, and investor sentiment. While short-term volatility has been evident, long-term trends suggest a stabilizing outlook. Investors should continue monitoring U.S. policy shifts, central bank actions in emerging markets, and IMF disbursements, all of which will play crucial roles in shaping forex market dynamics in the months ahead.