Forex in Five: Navigating the shifting sands of global markets: tariffs, the Fed, and new frontier opportunities

The unpredictable tariff landscape:

The initial blanket tariff policy has seen numerous revisions, with exemptions being granted on a country-by-country basis. However, the focus on territories like China remains significant, making the ultimate outcome of this unprecedented situation incredibly difficult to predict. It may take another month or two before a clearer picture emerges regarding the net effect on both developed and frontier markets. At Verto, we believe patience, not speculation, is key during this period of uncertainty.

A delicate dance: the US President and the federal reserve:

One development that has certainly caught our attention is the US President's public commentary questioning the Federal Open Market Committee (FOMC). The independence of central banks in setting monetary policy is a cornerstone of economic stability, and such remarks have understandably caused unease. While Fed Chair Jay Powell is known for his composed demeanor, his reaction, or lack thereof, will be closely watched.

Despite the political noise, the market continues to price in three to four rate cuts by the Fed before the end of the year, contingent on US and global growth. This expectation of dollar weakness is a significant factor currently shaping currency valuations.

The US dollar is under pressure

We're witnessing a notable negative sentiment towards the US dollar in the developed market space. Speculators are increasingly betting on the appreciation of non-dollar G10 currencies like the Euro and the Swiss Franc. Even the British Pound is gaining traction, particularly with the potential for a trade deal between the US and the UK, which could offset some of the immediate impacts of the tariffs.

Some analysts are even forecasting a move towards the 1.20 level for the Euro against the dollar by year-end – a significant prediction given the Eurozone's own set of political and economic challenges. While a move of that magnitude would be remarkable, the prevailing market sentiment clearly favours a weaker dollar at present.

Riding the oil price wave and investment flows in frontier markets

Turning our attention to frontier markets, the narrative remains closely tied to oil prices. The US tariff exemption on hydrocarbons provided some stability after a significant drop, with Brent crude recovering to around $65 per barrel from a low of $62. While this offers some relief to oil-exporting nations like Nigeria, a sustained and meaningful appreciation in their currencies likely hinges on oil prices climbing back towards the $75 mark or higher.

Interestingly, the US-China trade tensions appear to be creating new opportunities for some frontier markets. China's increased engagement and investment in countries like Nigeria, Kenya, and Tanzania suggest a strategic move to compensate for potential trade shortfalls with the US. This could lead to a net positive impact for these economies.

Nigeria’s stability amidst uncertainty:

In Nigeria, despite the global headwinds, the Naira has shown remarkable stability in both official and parallel markets, hovering around the 1600 level. Encouragingly, many institutional investors who held positions in Nigerian T-bills and IRMOs prior to the tariff announcements have largely maintained their positions, albeit with hedging strategies in place. If oil prices rebound, we could see a significant unwinding of these hedges, potentially leading to a strengthening of the Naira back towards the 1500 level in the short to medium term. However, this is contingent on a clearer and more positive global economic outlook.

Kenya’s inflation watch and shifting investor sentiment:

Kenya presents a slightly different picture. Inflation has edged upwards to 4.1% year-on-year, remaining within the central bank's target range for now. However, the cancellation of the IMF program and the prospect of a new, potentially more stringent one raises concerns about future inflationary pressures. If inflation breaches the 5% threshold, further interest rate cuts by the Central Bank of Kenya (CBK) are unlikely.

While the CBK is actively managing the exchange rate around the 129-130 level through dollar buying and selling, a significant depletion of FX reserves could limit their ability to defend the rate. Interestingly, despite positive signals of increased Chinese investment, foreign investors appear to be shifting their focus towards other African markets like Egypt, leading to temporarily reduced foreign investment appetite in Kenya. However, a significant upturn in oil prices could swiftly change this dynamic.

Looking ahead

The current global economic landscape is characterized by uncertainty and shifting dynamics. While the long-term consequences of the US tariff policies remain unclear, the immediate impact is creating both challenges and opportunities across developed and frontier markets. At Verto, we remain committed to providing our clients with insightful analysis and robust solutions to navigate these evolving market conditions. We will continue to monitor these trends closely and provide further updates as the picture becomes clearer. Stay tuned for our next "Forex in Five" for more in-depth analysis.