This month’s Forex in Five takes a deep dive into the latest shifts in global forex markets, from asset reallocation in developed economies to key developments in frontier markets.
Developed markets: US asset reallocation and recession concerns
A significant repositioning of assets out of the US has taken place, with investors shifting from US equities and bonds towards European, UK, and Asian markets. This shift is driven by multiple factors, including concerns over US tariffs, recessionary risks raised in discussions with the Treasury Secretary, and speculation around the Federal Open Market Committee’s (FOMC) next move. More rate cuts are now being priced in for this year, contributing to EUR/USD climbing above 1.10 and GBP/USD pushing towards 1.30—levels not anticipated just a few weeks ago. While a recession doesn’t appear imminent, institutional investors are taking precautionary steps, diversifying their positions across developed markets.
Nigeria: FX spread widens as liquidity tightens
The official and parallel FX market spread in Nigeria has widened again to around 2%, as corporates move to the parallel market to source USD liquidity. A decline in Nigeria’s foreign reserves suggests a drop in available dollars, as the Central Bank of Nigeria (CBN) continues defending the NGN 1,500–1,550 level. Meanwhile, Nigerian Treasury Bill yields have fallen below 20%, causing late investors to unwind positions. With inflation recently declining by 120 basis points due to rebasing, pressure is mounting on the Monetary Policy Committee (MPC) and CBN to begin rate cuts. While real interest rates attract foreign investment, domestic pressures could soon force policymakers to act.
Kenya: IMF program cancellation and currency defense
As anticipated in previous analyses, Kenya has exited its $3.6 billion IMF program after missing key fiscal targets, forfeiting around $800–$850 million in expected disbursements. The Kenyan government is now seeking alternative funding, including Eurobond issuance. Despite this, the Central Bank of Kenya (CBK) is actively defending the shilling, keeping it stable within the 129–130 range. However, with fewer dollar inflows from the IMF and U.S. aid, the Kenyan shilling remains fundamentally overvalued, and pressure is likely to increase in the coming months.
Tanzania’s FX market intervention amid continued shilling depreciation
The Bank of Tanzania (BoT) recently intervened in the FX market, injecting $20 million to curb shilling depreciation. Unlike December’s unexpected appreciation, which lacked clear intervention signals, this time the BoT’s action has been officially acknowledged. However, the shilling has continued to weaken beyond the 2,700 level. The narrowing spread between the official and parallel rates suggests limited room for further divergence. If current trends persist, the TZS 2,800 mark could be reached in the medium term.
XAF and XOF experience FX pressure as oil prices remain volatile
In the West African franc zone (XAF & XOF), Euro liquidity has increased, yet currency depreciation remains notable. The depreciation trend has accelerated alongside fluctuations in crude oil prices, which hover around $65 per barrel. Despite being traditionally tied to cocoa and agricultural exports, XAF and XOF are also feeling the weight of external shocks from the oil market. EUR/XOF has climbed well above the peg, with a current spread of around 1%. However, appreciation in the coming weeks is anticipated, though not necessarily back to levels seen a month ago.
Final thoughts
With US monetary policy uncertainty influencing global asset flows, frontier markets are navigating their own liquidity and policy challenges. Nigeria’s FX spread, Kenya’s IMF exit, Tanzania’s currency struggles, and XAF and XOF pressures are all key factors shaping forex trends this month. Stay tuned for further updates as the landscape continues to evolve.
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