FX Newsletter 22/10/2024

Highlights

Deputy president impeached by Senate

CBK support to banks hit KES 5 trillion on cash crunch

CBK summons bank bosses for not cutting lending rates

IMF slashes Kenya’s 2025 growth prospects to 5% from 5.3%

USDKES

The IMF's slashing of Kenya's 2025 growth prospects to 5% is a significant downgrade and could negatively impact investor sentiment and the local currency. Lower growth expectations may lead to reduced foreign investment and increased economic uncertainty.

The impeachment of the Deputy President by the Senate could further exacerbate political instability, which could negatively impact business confidence and foreign investment. This could also weaken the local currency.

The CBK's increased support to banks on the back of a cash crunch suggests concerns about liquidity in the banking system. While this may be a short-term measure to stabilize the financial system, it could also put pressure on the local currency. The CBK's summons of bank bosses for not cutting lending rates highlights the central bank's efforts to stimulate economic activity. However, if banks continue to hesitate in passing on rate cuts to borrowers, it could hinder economic growth and negatively impact the local currency. This combination of lower growth prospects, political instability, and potential liquidity issues in the banking sector could weaken investor confidence and lead to a depreciation of the

Kenyan shilling.

Our in-house models demonstrate that if KES appreciates further, the next level will be 125 whereas the USD will become too cheap for the market to ignore. If KES depreciates, the next level should be 136-139 at its extreme into year end thus there is more downside than upside for the local currency.

We think importers and any business exposed to USD should manage their risk by hedging into year end atleast as we believe the KES is overvalued at current prices. This would consist of 3-6 month insurance that we can provide. Exporters on the other hand should explore locking in the current exchange rate incase normalcy resumes and KES resumes its trend lower as it has YTD. They should hedge by locking in a 2-3 week rate that we can provide.

We enable businesses to lock in rates at a fraction of the value of the transaction.

USDX

The USDX, that is the USD index, has been trending even lower but USD might see a reversal as investors begin to buy the USD at these prices as uncertainty surrounding the Fed cuts that were already done by the Fed are in the rear mirror. Inflation should stay undercontrol in order for USDX to stay at these levels. Investors will probably await the upcoming election results thus any inflow into the US and thus strengthening of the USD may be after the election cycle.

EURX

The ECB cut rates at its previous meeting by 25 bp and this should lead to a weaker Euro, the ECB seems intent on synchronising with the Fed and thus we should see more cuts in the offing and a gradual devaluation of the Euro if inflation continues to trend lower for Europe as well. Geopolitical risks such as the Iran-Israel fuel may put this policy in jeopardy though.