Forex in Five: US Fiscal Uncertainty, Nigeria’s FX Convergence & Kenya’s Debt Swap

Big moves in developed markets

This week has been eventful for developed markets, with significant movements across Europe and the UK. The UK announced an increase in defense spending, while the German elections resulted in a new coalition government. However, the broader G10 FX space remains largely influenced by the US.

US tariffs continue to loom in the background, but the immediate focus is on the fiscal budget proposed by the President. Key highlights include major cuts to Medicaid, which have already affected emerging markets. US aid reductions have forced several frontier economies to make difficult adjustments. Treasury yields have reacted to these fiscal policy changes, and potential tariff impacts—particularly on the Canadian dollar—remain a key consideration.

With regards to monetary policy, interest rate cuts remain uncertain. The Federal Open Market Committee (FOMC) in the US may implement one more rate cut before the end of the year. However, speculation is growing that further movements may be postponed until 2026.

Nigeria: parallel market convergence and monetary policy 

Nigeria’s foreign exchange dynamics have seen a major shift. The parallel market has appreciated significantly, leading to the spread between it and the official exchange rate narrowing to zero—and even turning negative in some instances. Structurally, little has changed in market access, but an increase in dollar liquidity in the official market has gradually spilled into the parallel market, leading to this unexpected convergence.

The key question now is whether this trend will persist. If the spread widens again, will it be due to parallel market depreciation or official market appreciation? This delicate balance remains uncertain. Additionally, Nigeria’s recent MPC meeting concluded with no further rate hikes, a significant hawkish stance by the central bank. While GDP growth has been robust, the recent CPI rebasing has created uncertainty around inflation trends, making future monetary policy decisions highly anticipated.

Kenya: Eurobond buyback and debt restructuring 

The Kenyan shilling experienced some depreciation recently, reaching levels of 130, but has since rebounded. The most notable development has been Kenya’s announcement of a Eurobond buyback and reissuance—a form of debt swap. The new Eurobond issuance extends maturities to 2031, easing immediate financial obligations. While this provides short-term relief, institutional investors often view such moves negatively as they indicate potential liquidity challenges.

Additionally, the UAE’s loan to Kenya has raised concerns. Some speculate that the government is preparing for a possible non-renewal of the IMF program, which could have significant implications for investor sentiment and the shilling’s valuation. The central bank continues to defend the currency strongly, with the shilling stabilizing around 129. April will be a crucial month as discussions with the IMF progress.

Tanzania: stability and monetary tightening 

Tanzania’s FX market remains relatively stable, though a minor spread has re-emerged between the parallel and official markets. The Bank of Tanzania has consistently raised rates over recent weeks, contributing to overall stability. However, anecdotal evidence suggests that Tanzanian shilling liquidity may be tightening again. Whether this leads to a snap appreciation, similar to December’s movements, remains to be seen.

Central Africa: Cocoa harvests and FX peg stability 

Across Central Africa, currency movements have been minimal. Cocoa harvests have come in slightly below expectations, but this is unlikely to drive significant FX fluctuations. The CFA franc remains close to its official peg, though there is some room for potential depreciation. Six months ago, the currency traded around 706, but it currently hovers near 690, with expectations for relative stability in the short to medium term.

To sum up…

As February comes to a close, global FX markets continue to grapple with a mix of fiscal policy changes, election outcomes, and monetary shifts. The coming months will be critical in determining the trajectory of G10 and emerging market currencies, with particular attention on the US fiscal landscape, Nigeria’s exchange rate dynamics, Kenya’s debt restructuring, and Central African stability.