Central Banks play a major role when it comes to how your local currency moves in the market.
They control the monetary policy mechanism of a country by fixing interest rates, controlling the supply of domestic currencies and intervening on the forex market. Usually, Central Banks with large FX reserves are better equipped to defend its local currency in times of crises. South Africa’s gross forex reserves totaled $61.795 billion as at April 2024, making it the African country with one of the largest FX reserves.
A rise in interest rates in a country may encourage investors to pursue higher returns, relative to other countries.
Investors would typically demand for more of any currency that offers higher returns. Recently, the Central Bank of Nigeria hiked interest rates to 26.25% while in Ghana, interest rates have been around 29%. In Japan, interest rates are yielding near 0.1%. From a pure return perspective, where would you want to invest your money?
A country’s macroeconomic data such as its inflation rate, trade balance, and foreign debt can impact on the value of the currency.
For example, in 2024, investors have flocked into the Kenyan market as a result of economic optimism after the Kenyan economy expanded by 5.3% in 2023. The IMF also granted a dollar-denominated loan to help ease Kenya’s outstanding foreign debt burden. Year-to-date, the Kenyan shilling has gained about 16% versus the U.S. dollar.
The forex market is speculative and forward-looking.
Investors anticipate future economic or geopolitical developments to benefit from opportune trades. On the futures market, traders anticipate with near certainty that the European Central Bank and the Bank of England will start to cut interest rates before the US Federal Reserve, and as soon as June 2024. In anticipation, the Euro and GBP are already showing some signs of weakness against the USD.
