The foreign exchange (forex) market is developing substantially and rapidly across continents, with Africa being no exception. A report available on AllAfrica notes that the number of active forex traders in the continent is around 1.3 million, with many of these traders coming from Nigeria, South Africa, and Kenya. One of the key growth drivers in the forex boom in Africa is the need for alternative income streams beyond employment, as the predominantly young demographic of African traders relies on trading currency pairs to build their wealth from the comfort of their homes. Another contributing factor is the accessibility of forex markets, in large part due to the rise of online brokers with low startup and transaction costs.
When traders use an online brokerage, they must conduct not only technical analysis in terms of trends in price movements but also fundamental analysis through the study of the overall state of the economy. Various aspects of forex trading are affected by high-level economic news, from spreads that may widen when markets experience lower liquidity to the margin requirements calculated by the platform depending on market conditions. While you can choose a reputable trading platform that guarantees low and stable spreads even amid volatile exchange rates, it still helps to regularly track economic news, market-moving events, and upcoming data releases using the platform’s built-in economic calendar. Doing so informs your currency trading positions and the amount of leverage you can use.
Now that you understand how essential fundamental analysis is to your overall trading strategy, here’s a more in-depth look at how various economic news and policies can impact forex markets here in Africa.
Currency exchange rates
Many sub-Saharan African currencies struggled against the US dollar in the first half of the year. The depreciations were driven by both internal and external factors like investors’ lower risk appetite for global markets and a decreased demand for the region’s exports. Weaker currencies imply rising commodity prices for the general population, as well as bearish markets for investors whose trading pairs include an affected currency, such as the European euro vs. South African rand. In such cases, it’s crucial that forex traders monitor the monetary policies employed by the government to stabilize the domestic currency and alleviate inflationary pressures.
Take, for example, how Nigeria’s recent forex reform involved President Bola Tinubu’s decision to unify exchange rates by floating the naira against the dollar and other global currencies. Although this can potentially enhance competitiveness by allowing the currency to adjust freely to market conditions, this directive remains controversial since it only widened the spread between the naira and the dollar, with the spread reaching 61% in 2022. Consequently, forex traders must wait until the exchange rate volatility can close the gap and the naira regains strength.
Banking interest rates
A bank account is crucial to depositing and withdrawing funds from your chosen forex trading broker. Aside from ensuring the platform accepts your bank as a payment method, you must also be aware of any bank charges that may be levied against you for your investments. For instance, there are conversion fees for forex transfers and service charges that vary based on your platform and account’s equity. You can minimize transaction costs and maximize profits by looking through your broker’s and bank’s respective policies for banking fees.
However, forex traders are affected not just by individual banks’ currency conversions but also by the central bank’s interest rates, primarily determined by the government. When South Africa’s central bank hiked its interest rate to a 14-year high (8.25%) in May 2023 to curb inflation, it also raised the demand for the domestic currency rand, allowing it to gradually strengthen against the dollar. But traders must remember that this movement can be fast-paced and risk-sensitive. Traders must thus look at the whole picture and know how the other currency in the trading pair relates to the high-interest currency. Usually, traders opt for a carry trading setup wherein a high-interest currency is paired with a low-interest currency to take advantage of daily interest rate differentials.
Forex reserves
Beyond interest rate hikes, governments with weakening currencies can also rely on forex reserves, which are the central bank’s holdings of foreign currencies in the form of banknotes, deposits, bonds, and other government securities. Although they are mainly used to absorb economic shocks like inflation and lack of liquidity, they play a role in forex markets by managing a currency’s value. Reserves can help keep a currency’s value lower than the dollar to boost exports or maintain the currency at a steady exchange rate.
However, it can be challenging for forex traders when the currency they buy depreciates due to the country’s lack of reserves. Such is the case with Kenya, whose forex reserves have been under pressure due to rising costs for external debt servicing. Its usable forex reserves only stood at Ksh1.058 trillion (R$138 billion) in July 2023, raising concerns over the country’s ability to control the continuously declining shilling. Forex traders must wait for more capital inflows that can positively impact the country’s reserves and, by extension, its currency.
Imports and exports
Lastly, forex traders must also consider which goods a country chooses to import or export. To illustrate, Angola is an oil-exporting country recently pursuing economic diversification in light of oil increasingly becoming a volatile commodity. Since about 65% of the country’s forex earnings come from oil exports, declining oil prices mean their local currency also goes down. Should Angola achieve its goal of diversifying its economy through agriculture, traders of the USD/AOA currency pair can expect less volatile market conditions. The same principle applies to other sub-Saharan African countries whose export revenues solely rely on highly volatile commodities other than oil, such as gas, minerals, and raw materials.
In essence, successful forex trading stems from one’s ability to take into account all the fundamental factors that can affect a domestic currency or the currency pair itself. Although it sounds complex to keep track of news and updates on fiscal and monetary policies from around the world, the increasing penetration of Internet connectivity and online trading platforms in Africa can help ease the process and bring crucial information within your reach.