This past week which started on 11 August 2025, there was scrutiny over the Fed's independence amid rate cut speculation, relative stability in Nigeria's frontier market due to Central Bank of Nigeria (CBN) intervention, Kenya's ongoing fiscal challenges, as well as currency market volatility in Tanzania and debt concerns. Let’s dive into these emerging market insights together.
Scrutiny amidst rate cut speculation
The focus in developed markets was on the U.S. and the questioned independence of the Federal Reserve (Fed). However, there was a reprieve as CPI inflation data came in well below expectations. While it typically prompts FOMC rate cuts, there was no change witnessed this week. There is, however, a 25 basis point rate cut in September expected by a few experts, with some predicting a 50 basis point reduction before year-end.
Comments from the U.S. Treasury Secretary, Scott Bessent, hinting at a further 150-175 basis point rate decrease will continue to raise questions about the Fed's independence. The lower inflation figures, combined with calls for rate cuts, have contributed to some dollar weakness. A governmental organization's strong statement to the Fed raises questions about whether Fed Chair Jay Powell will be dismissed and if the Fed will become a politically aligned entity.
Currently, the Euro is peaking at around 1.17, and GDP has returned to 1.36. Significant dollar weakness is unlikely due to the extensive selling pressure in recent months and substantial Euro positioning for asset building. A more notable shift might occur if the Fed adopts a more dovish stance, prioritizing economic growth and job creation, and the U.S. could experience up to three more rate cuts by year-end.
Nigerian frontier market stability and CBN intervention
The anticipated impact of the new tariff regime, expected around August 1st, was muted as many tariff cut-offs were postponed. G-10 currencies experienced fluctuations, largely in response to the dollar's movements.
For instance, Nigeria's official market continues to exhibit a prolonged period of stability, with trading levels hovering around 1530-1540. However, the past week has seen some shifts, including periods of depreciation and noticeable intervention from the CBN). While the CBN has historically supplied dollars periodically to maintain market liquidity, it became more evident earlier this week around with 1536 levels employed to counteract impending depreciation.
This tactic, though not new for the CBN, appears more strategic, given the sustained stability in the FX market. This stability has generated significant interest among foreign investors in Nigeria's carry trade, drawing parallels with the success of Egypt's carry story. The appeal lies in buying into T-bills or longer-dated bonds for potential returns throughout the year. For portfolio investors, a stable FX is a key factor in driving this attractiveness.
With reports suggesting Nigeria's reserves are now exceeding $40 billion (though this figure is subject to debate), the CBN clearly possesses the resources to defend the currency in the short term. Consequently, the currency is expected to remain around its current levels for the next two to three months. Towards year-end, seasonal demand from corporates re-balancing balance sheets could also influence flows. For now, the parallel market has also remained relatively stable, trading within approximately 1% of NAFEM.
Kenya's fiscal challenges
This week, Kenya's Central Bank (CBK) further cut interest rates by 25 basis points. With inflation on the rise, this signals the likely end of the rate-cutting cycle. Despite political pressure to appease the public before upcoming elections, the Treasury Secretary's statement indicates that fiscal reform efforts have been exhausted. This suggests that privatization of businesses or attracting offshore investors to buy government assets may be the only remaining options to rebalance values.
While this may not inherently be a negative development, it could complicate Kenya's ongoing IMF program, which is set to conclude by the end of the year. The IMF is unlikely to favor a stance that fiscal policy cannot be tightened further, which could jeopardize the continuation of the program. Kenya has shown little willingness to adopt austere fiscal measures.
This situation may lead to issues later this year, particularly regarding the Kenyan shilling's exchange rate. For the past 18 months, the shilling has largely remained within the 129-130 range against the dollar, with a potential slight movement to 131. The CBK has actively managed this range by buying when the shilling is low and selling when it's high, maintaining reserve levels at approximately $8-10 billion. Consequently, significant depreciation is not expected in the near term, though pressure is building. The absence of an IMF program in 2026 could lead to increased depreciation.
Currency market volatility continues in Tanzania
Bank of Tanzania (BOT) initially lowered rates, leading to an 8% depreciation of the local currency. However, this was quickly followed by an equally sharp appreciation. This isn't the first time such rapid fluctuations have occurred, marking the third instance in the past year. Local banks appeared to follow the BOT's lead on cheaper rates, quickly depleting their dollar reserves. Once these reserves ran out, rates inevitably rose again. This wild volatility undermines foreign investor confidence.
The XAF has recently mirrored the trends observed in the XOF. As this concern has persisted for several months, Senegal has released further data regarding its debt-to-GDP ratios. Although the ratio may be slightly higher than previously stated, Senegal’s government asserts that it is being adequately managed, thereby preventing any future depreciation for either the XOF or XAF. Though a return to the peg is not anticipated yet, a premium of 1-2% is likely in the immediate future.
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