Instability and Volatility – Impeding African Currency Trading

Since the year 2016 began, we have experienced a series of random fluctuations in prices both in the commodity and financial markets. This has been a global phenomenon and Africa as a continent was not let out of the ongoing global economy shake-up. With most African economies being dependent on commodity markets, the drop in oil prices has hit some of them hard such as Nigeria. Nevertheless, other economies have remained resilient and shrugged off the global turbulence to maintain a stable outlook both in the short-run and in the long run.

Speaking last week at the just concluded World Bank Sprig Summit 2016, the Vice President for World Bank Africa Mr. Makhtar Diop highlighted the impact of having over 60% of the continent’s export being oil among other commodities. In his speech he noted that over-reliance on commodity exports puts Africa at a very risky situation in times like now when the commodity prices are fluctuating every now and then and hitting all-time lows.

Of great importance to note from Mr. Makhtar’s speech is that when commodity prices fall, the commodity exporting countries become cash trapped and this has a direct effect on their exchange rate. With decreasing exports and a constant level of imports, the countries’ balance of payment gets off-balancing falling deeper to the deficit side. This then results to higher demand for dollars to pay for imports; while the supply of the same currency is not being replenished by an equivalent inflow of dollars from exports.

Eventually, we end up with a situation of demand outstripping supply for the dollar and hence its price goes up to a new equilibrium level, resulting to a depreciating local currency. Nigeria which is one of the leading oil exporters in the world and a member of OPEC has been hard hit with the fluctuations in the commodity prices. The Nigerian Naira has depreciated by about 25% since last year when it was trading at 160 Naira for one dollar to the current rate of 200 naira for a dollar. Nigeria enjoyed the dividends of a peaceful election; but due to the consistent terrorism threat from Boko Haram, there are fears of insecurity which also contributes to wavering investor sentiments that keep their local currency fluctuating.

In Kenya, a leading economic powerhouse in East Africa; they have managed to keep their currency stable around the Ksh. 100 to the dollar. This however has come as a result of a consistent monetary policy stance that saw the Central Bank of Kenya maintain its central bank lending rate at 8.5% for more than one year. They later raised it early on this year to 11.5% in a bid to curb excessive borrowing and maintain inflation rates within the required margins in the medium term below a double digit rate. This has worked successfully and it is a policy measure being emulated by their central bank peers in Nigeria, Egypt and South Africa. However, even with the stability in the short-run, Kenya will be having elections next year and as elections fever catches up, the markets always catch a cold and fluctuations in the forex markets become more pronounced.

With this kind of volatility in African currencies, it becomes difficult to trade them in normal retail forex brokerages. All traders are risk takers including te forex traders; they all have to accept to getting into unknown territories in search of high returns from their investments. However, traders can only take in too much risk; and the volatility and political instability in Africa only makes it more difficult for them to trade in African currencies. Where hedging is involved, it becomes a very complex system due to the high risk with each party in the futures contract trying to protect themselves from the unknown as much as they can.

In order to overcome these market challenges when trading in unstable African currencies and indices traders can use platforms such as AVATrade’s CFD trading platform which allow one to trade in currencies and indices without actually owning them. But even with such platforms, the risk is still high for the traders and the amount of money they are willing to invest in forex trading for African currencies remains low.

It is therefore paramount to have governments in Africa working on ensuring that there is security and stability by weeding out terror groups that scare investors and making sure peace prevails during and after elections for smooth economic transitions during the political transitions. In the words of the World Bank Vice President for Africa Region Mr. Makhtar Diop, the most important thing to do is to ensure Africa transitions from being dependent on commodity exports so that it cushions itself from the economic shocks that come with frequent commodity price fluctuations. With a relatively calm economy free from random price changes on a day to day basis, we shall then be able to get more traders being involved in the retail brokerage for African currencies and indices.

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