Uncertain times in currency markets

 Relative to Africa's key units like the rand and Ksh the US dollar is riding high and boosting exporters.

But compared with others like the naira and Mozambique's surging metical it is not, nor with rival global currencies such as the yen, Swiss franc and euro, and now China's yuan too (a key long-term trend that is often overlooked). And the rising discrepancy between stock market returns measured in local and USD values in the industrialised countries suggests that the US currency is undervalued, too. Which is why we predict a general dollar hardening over the next 12 months, exacerbated by the predicted return to recession in the troubled Japanese economy.

 

Germany and Switzerland seem to be leading the global recovery right now if industrial output and inflation are used as measures. And Europe's general widening economic gap between north and south – or as more accurately stated, fringes - suggests the same trend is on its way.

Of course the key developments for Africa over the last month have been the weakening in the price of oil as the signs build up of the 'Arab Spring' spreading no further, matched by continuing hardness in most soft commodity prices.

And above all of the price of gold of course, which has surged from just US$1200/oz last August to well over $1500 by the middle of May. This is certainly a good time to be a commodity exporter, and with a stake in nearly all sectors of these markets sub-Saharan Africa is certainly well placed this year. It's just a pity that some states like those of the CFA zone are not well placed to benefit, given the instability of conditions and prospects in the euro-trading area.

What happens next will probably be a consequence of two conflicting trends. First, economic growth is expected to slow throughout the industrialised countries next year, which doesn't augur well for a continuation in Africa's commodity boom unless the Chinese step once more into the breach.

Second, domestic price rises are showing some worrying trends in countries like the UK where inflation is now up to South Africa's level, which suggests that the pound sterling is not the best prospect today, especially as significantly higher returns on funds invested in stable banks can now be achieved in continental Europe. And that's to say nothing of the astonishing news from the IMF, which could mean relaxation of the European/American grip on this key institution at last.

Bob Adams

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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