Strategy Note /

ETM Africa currency outlook

  • Tightening USD liquidity conditions hit African currencies

  • African FX losses led by the Ghanaian Cedi

  • NDFs provide insight into how much currency risk is priced in

Daron Hendricks
Daron Hendricks

Financial Market Analyst

ETM Analytics
7 July 2022
Published byETM Analytics

Tightening dollar liquidity conditions hit African currencies                                                           

The hawkish shift in global monetary policy from major central banks has resulted in a receding tide of dollar liquidity in the global financial system. Africa has been hard hit by the changing tide of global liquidity as it has amplified dollar liquidity constraints across the continent. Many African businesses, both big and small, are struggling to access hard currency to facilitate foreign transactions, such as the purchasing of imported goods and services.

ETM’s Dollar Liquidity Indicator underscores that we are approaching the tail-end of the global upswing in dollar liquidity. Now that the Federal Reserve has begun unwinding its pre-pandemic policies, it is only a matter of time until the indicator starts its trend lower. Although this is a broader macroeconomic theme, it does pose challenges to frontier market currencies. With the global dollar liquidity tide turning, investors are turning more judicious in where they place their money.

In a recent report titled: How Africa can Navigate Growing Monetary Policy Challenges, the International Monetary Fund (IMF) said shallow markets (markets with limited liquidity) can amplify exchange rate movements and yield excessive volatility. Foreign exchange markets tend to be shallow in many African countries, as evidenced by the widespread between the bid and ask prices. The IMF added that foreign-currency-denominated liabilities are also a significant factor why many African countries are vulnerable to dollar illiquidity/scarcity. With major developed market banks expected to hike rates further as inflation continues to soar, the dollar liquidity crisis in Africa is expected to worsen. As such, we expect capital controls to intensify, making it increasingly harder for African businesses to repatriate revenue/profits from one country to another. Moreover, as demand for dollars increases due to the rising cost of imported goods, currency pressures in Africa are expected to intensify.

African FX performance

It was a volatile first half of the year for African currencies following the sudden deterioration in global risk sentiment at the end of February amid the Ukraine war and the broader transition to a tighter monetary policy environment, which has resulted in FX fluctuations, increased borrowing costs and a sharp rise in foreign portfolio outflows. However, we do not foresee the same kind of exchange rate volatility as during the 2013/14 taper tantrum. While some currencies have been relatively resilient, some have been compounded by USD liquidity shortages, such as the Nigerian naira, the Ghanaian cedi, the Egyptian pound, and the Zambian kwacha. As a result, the USD liquidity issues are largely manifesting in the respective central bank’s stepping in to supply USD to the market. That said, they are finding it increasingly harder to do so, given the global tightening cycle. Against this backdrop, we examine these African currencies through the lens of the non-deliverable forward (NDF) market, which provides some insight into how much currency risk the professional market is pricing in.

NDF markets are developed in response to restrictions that constrain access to onshore markets. Restrictions take many forms, including requirements on underlying asset exposure for currency positions. For investors, banks, and corporates, NDF markets are often an attractive alternative to onshore markets due to the absence of regulation, longer trading hours, often good liquidity, no convertibility risk, and reduced credit risk because of net settlement. These factors, however, raise concerns over spillovers from the offshore to the onshore market. Large price dislocations in currency forwards have real economic consequences. Hedging for corporates and investors could become exorbitantly expensive. As a result, spillovers to other assets can occur. For example, when NDF pricing makes hedging currency risks stemming from local currency bond investments expensive, it can prompt foreign investors to sell bonds. The section below provides a current overview of several African NDF market developments and the direction of influence between NDFs and onshore currency markets.


Commercial banks in Nigeria have reduced how much foreign spending their customers can make, a clear indication of how Nigerian banks are struggling to meet the dollar demands of their clients as Africa’s dollar liquidity crisis intensifies. The hard currency liquidity constraints are evident in the significant sell-off in the naira in the secondary market, which recently reached its weakest level on record against the USD.

Nigeria’s naira (NGN) has traded just off record lows versus the dollar in the non-deliverable forwards market (NDF), with markets betting that a devaluation to tackle a spiralling economic crisis is only a matter of time. It is well known that Nigerian markets are under increasing pressure from an acute shortage of hard currency caused by the global tightening of monetary policy. As a result, individuals and firms are scrabbling for dollars, which has pushed the naira to 614 per dollar on the black market versus the spot market rate of around 425. There are also expectations of further interest rate hikes to tackle inflation and keep price expectations from becoming overblown.

This comes after the central bank surprised the market with its biggest interest rate hike since July 2016 with the board opting to raise rates by 150bps to 13%, also its first-rate hike in more than two years. That said, the Nigerian central bank is concerned about the nation’s economic growth, and any reluctance to hike rates further raises questions about whether this could be a precursor to a change in the banks’ policy on foreign exchange. Until economic data suggests that inflation is spiralling beyond measure, the authorities will likely accept the weak growth outlook for a weaker currency.

The currency swap, the difference between the NDF and the onshore forward, points to the Naira facing devaluation risk toward year-end and would continue to support a bearish view on the NGN. Specifically, the 9-and-12-month USD-NGN forward implied rates suggest that the spot could increase by roughly 40 forward points during the time horizon, taking the spot to roughly 470/$ by year-end. This would equate to roughly a 10% devaluation in the NGN. Not surprisingly, the NGN outlook remains bearish following the external pressures that are still expected to transpire as oil prices begin to moderate. Admittedly, even if the Central Bank of Nigeria (CBN) was able to sufficiently provide FX liquidity to clear the current backlog, there is the concern that a good portion of investors will be quick to exit the market.  


The Ghanaian cedi (GHS) is the worst-performing currency in Africa this year among 22 currencies tracked by Bloomberg. Only the cedi and Malawian Kwacha have registered losses north of 20% on a year-to-date basis, with the latter’s poor performance coming on the back of a 25% depreciation by the central bank. The aggressive policy tightening by the Bank of Ghana (BoG) since November last year and a raft of fiscal measures have so far done little to prevent a sell-off of dollar-denominated government debt that’s fuelling a slide in the cedi.

Further weakness appears on the cards with the non-deliverable forwards market currently pricing in depreciation north of 9.800/USD over the next 12 months. Meanwhile, the difference between the NDF and the onshore forward indicates a significant price dislocation in the currency during the same period, roughly 6%. There is a risk of this spread widening further as Ghana faces a looming fuel shortage as the BoG rations dollars after oil prices surged following Russia’s invasion of Ukraine. But importantly, it can longer plug the shortfall in the black market. Policymakers are looking at ways to increase their foreign exchange holdings which have plunged this year.

Going forward, it remains to be seen whether the recent measures adopted by the government and central bank will reverse the cedi’s fortunes. We, however, see risks for the cedi as tilted to the upside as concerns over the credibility of the country’s fiscal objectives remain. That said, signs that the government will turn to the International Monetary Fund for financial assistance have boosted sentiment. Should the government secure a deal with the IMF, the cedi would likely stage a meaningful rebound.


The outbreak of the Russia-Ukraine war, which prompted foreign investors to pull billions of dollars out of Egyptian Treasury markets, was the root cause of the Egyptian pound's (EGP) problems. This led to the government devaluing the currency by nearly 14%. As a result, Egypt’s once-lucrative carry trade has diminished this year as inflation soars and sentiment towards the country deteriorates, given its sensitivity to the situation in Ukraine. The mass exodus of foreign capital presents a notable risk of a further devaluation of the currency as we continue to shift to a world of tighter policy settings. This can be seen in the NDF market, with all the tenors jumping considerably higher since the start of the year. Participants bet on the currency weakening by 25% after trading steady over the past two years around the 16.00/USD handle following the breakout of the war. Since then, the currency stabilising in April and May above the 18.00/USD mark, but speculation on the EGP has continued to build. By year-end, we can expect the pair to trade within a range of 20.00 - 22.100/USD. Overall, the EGPs’ weakness from deteriorating global risk sentiment, widening current account deficit and policy tightening should prove transitory amid a recovery in inflows. Because the central bank is advertently looking to maintain attractive real yields by retaining foreign portfolio investors invested in government paper, the potential for a major blow-off in the Egyptian pound appears somewhat more contained.          



The Zambian Kwacha (ZMW) has remained resilient in Q2 in the face of a plethora of headwinds ranging from the war in Ukraine, idiosyncratic challenges, and dollar liquidity challenges. It is currently the best performing African currency on a quarter-to-date basis against the USD, chalking up gains of 6.44%. The notable strength in the kwacha has come on the back of favourable political sentiment following the election of Hakainde Hichilema as the President of Zambia. More recently, some support has emanated from central bank intervention and positive sentiment amid rising investor confidence in the economy. Lastly, ongoing credit talks and a promising mining sector outlook have boosted sentiment. Further strength in the coming months will ultimately depend on how soon debt restructuring can begin and IMF board approval can be granted. Any delays could prevent the kwacha from meaningfully appreciating further in the coming months.

Since trading mostly above the 17.00 mark since April, the USD-ZMW has risen in a stepwise fashion towards technical resistance levels, namely the 50-and-200DMAs in the area of 17.2130. The NDF market points to the pair resuming its upward trend over the upcoming months since current levels are vulnerable to being breached. The spot is specifically shown aiming for the 18.000-region in the following six months before increasing to the 19.00-handle in the following six months. These levels may be difficult to defend if copper prices continue their recent slump. But on the other hand, should Zambia secure a deal with the IMF by October, some of the bearish positionings could be unwound as it would reduce the nation’s fiscal risks.  


The global economy has taken multiple shocks over the past year, and they are far from over. Investors are moving into a “risk-off” mode as recessionary fears weigh on financial markets, and persistent rises in inflation are driving up FX volatility and the chance of default, making frontier markets unattractive. In turn, investors anticipate further monetary policy tightening by global central banks, which weigh on bond pricing, real yields, currency performance and investment attractiveness. As a result, it is not surprising to see African NDF markets signalling currency deterioration in the months ahead. While being a double-edged sword, the volatile African FX markets might present traders with promising opportunities in the coming months.