Macro Analysis /

USD overvalued by 15-20%, interest in crypto in Africa continues to grow

  • Forex: Ghanian Cedi weakness contributes to surging inflation in December

  • Fixed Income: Bets rise for the US Federal Reserve to bring forward its first rate hike

  • Macroeconomic: South African Rand rallies as dollar plunges

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
13 January 2022
Published byETM Analytics


In the commodity space, oil prices are steady this morning after continuing with their new year rally yesterday. The front-month Brent contract tested the $85 per barrel mark yesterday, supported by a weaker USD and a tightening market. The contract failed to sustain the break above this key level but we could see the bulls try once again in the sessions ahead. Demand has been more resilient than what many expected as we kicked off the new year, while concerns remain over supplies as many OPEC+ members are struggling to reach their output quotas already, even though another 400k barrel per day increase is likely to be announced at the start of the February.

Technical indicators, however, are starting to flash some warning signs to suggest that the near term rally may have gone too far. The 14-day RSI has reached the overbought threshold for the first time since October, while in the US, options volumes surged for March put spreads on WTI, indicating increased demand to hedge against the downside. On balance, therefore, we may see oil prices eke out more gains in the near term, but it is starting to seem that the commodity may be close to topping out.                                                                                                                                                     


Morocco: The World Bank has forecast Morocco's economy to grow by 3.2% this year vs 5.31% last year, mainly due to a likely year-on-year fall in agricultural output. According to the World Bank, the economy "is entering a phase of normalization after an unprecedented shock ." The recovery, however, "remains incomplete and asymmetric." The bank added that achieving growth targets of King Mohammed VI's much-touted economic revamp will mean "Morocco will have to overcome its over-reliance on capital accumulation as its main source of growth and undertake "multi-faceted structural reforms."

Morocco: Data from Triplea shows that in 2021, Morocco's peer-to-peer crypto trade volume of $6mn was enough to see it ranked North Africa's top cryptocurrency trading nation. Only Nigeria, South Africa, and Kenya topped Morocco's volumes in the broader African region. Interest in cryptocurrency in Morocco has been rising despite the country's standing regulations against crypto trading, which were first announced in 2017. Note, the increase in Morocco's peer-to-peer traded volumes came during a year when Bank-Al-Maghrib said it would explore the benefits of launching a digital currency.

Nigeria: Nigeria's finance ministry is basing its budget on pumping 1.88M barrels per day of oil this year. According to Finance Minister Zainab Ahmed, National Assembly approved the volume forecast, which includes condensate production. Ahmed also said that Parliament raised the oil price benchmark for 2022 to $62/bbl from $57/bbl proposed by the finance ministry. Note, the World Bank forecasts that crude oil prices will average $74 per barrel in 2022 as oil demand strengthens and reaches pre-pandemic levels. According to the finance minister, Nigeria's 2022 budget aims to continue the reflationary policies of the 2020 and 2021 budgets, which have helped put the economy back on the path of recovery and growth.

Rwanda: In its latest Article 4 consultation, the International Monetary Fund (IMF) forecast Rwanda's economic growth to gradually return to a pre-pandemic trend of 7.5%, compared with a forecast of a 10.2% expansion for 2021. According to the Washington-based lender, strong foreign direct investment, continued high public investment, and the recovery in trading partner countries will underpin growth. The IMF, however said that high uncertainty surrounds prospects for sustaining the recovery. The future course of the pandemic in Rwanda and globally remains highly uncertain. New waves of infections and new variants of the virus continue to undermine confidence and present a clear downside risk to the growth outlook and could lead to higher fiscal and external financing needs. On the other hand, building on the ongoing growth momentum, a stronger-than-expected impact of the fast vaccine rollout in the country and globally could provide an upside risk that would boost confidence and economic activity.

SADC: The 16-member group in a statement yesterday said that countries had agreed to extend a military deployment in Mozambique to help put down an Islamic State-affiliated insurgency that's killed thousands of people and delayed a $20bn natural-gas project. The heads of state extended the mission's mandate "with associated budgetary implications" and will "continue to monitor the situation going forwards," according to a communique issued by the bloc after the meeting ended. It didn't say how long the latest extension would last. There has been significant progress in containing the insurgency since the deployment of Rwandan soldiers, followed by the SADC troops.

Zimbabwe: Data from the Reserve Bank of Zimbabwe showed that gold production in 2021 rose by 56% to 29,629.61kgs. In December, deliveries increased to 4,342.01kgs from 1,558.35kgs a year earlier. The jump in gold production in Zimbabwe will be a welcome development given it generates most of its foreign exchange earnings from mining, with significant contributions from the yellow metal, platinum, and chrome.

Forex: Ghanian Cedi weakness contributes to surging inflation in December

Price pressures remained entrenched in the Ghanaian economy, judging by the latest CPI data. Headline inflation in Ghana accelerated further in the final month of 2021, coming in at 12.6% y/y from 12.2% y/y in November. The December print surpassed consensus expectations of 12.5% y/y and was the fastest pace of price growth in the economy since April 2017. On a month-to-month basis, prices climbed 1.2%. A breakdown of the data showed that headline inflation was underpinned by higher housing, water, electricity, and gas costs. Meanwhile, food price inflation slowed to 12.8%  from 13.1% in November, while non-food price inflation accelerated to 12.5% from 11.6% in the month prior.

The continued weakness in the Ghanaian Cedi (GHS) further fanned inflation in December. For context, the GHS lost -0.73% against the greenback and was the fifth-worst performing African currency out of a basket of 23 currencies tracked by Bloomberg. The GHS in December recorded its seventh monthly loss out of the past eight and ended the year around 5% weaker. Factors such as increased corporate demand for the US dollar and the exit of the country's bond by some foreign investors put pressure on the local currency in the last two months of the year.

Headline inflation in Ghana has now breached the Bank of Ghana's 6-10% target range for a fourth consecutive month. While policymakers in November raised the benchmark rate by 100bps, citing "significant" inflation, it appears its effects are yet to filter through. Looking ahead, demand pressures from the Christmas season and the limited supply of goods and services are expected to feed into price growth through January. Therefore, with inflation continuing to accelerate and dollar-denominated government debt trading at distressed levels, risks exist that policymakers may consider further tightening at the next meeting.

Fixed Income: Bets rise for the US Federal Reserve to bring forward its first rate hike

Official data published on Wednesday showed that headline inflation in the US continued to surge in December, coming in at a 40-year high of 7.0% y/y. It must be noted that inflation printed in line with expectations. The sharp rise in inflation came against the backdrop of soaring oil prices, with the front-month Brent contract hitting a 2-month high on the back of tight supply and easing concerns over the spread of the Omicron variant.

The strong US inflation print continued to underpin the notion that soaring consumer prices in the US are not hindering demand. As such, given Federal Reserve Chairman Powell’s latest comments, it is widely expected that the Fed will not overreact to the rise in inflation. That said, Fed fund futures are now pricing in nearly four rate hikes this year, a marked shift from a couple of months ago. Note that long term rate expectations have remained relatively stable.

While the Fed is expected to hike rates as much as four times this year, it is worth pointing out that US interest rates are seen peaking at 1.5% by Q3 2024, well below the peaks of previous rate hiking cycles. Notwithstanding the strong headline inflation print and rise in international oil prices, the USD and US Treasuries sold off yesterday. The sell-off in the USD and US Treasuries came as the market had already priced for a more aggressive pace of tightening and was therefore due a correction if inflation conformed to expectations. Recall that Fed Chair Powell also alluded to the fact that the Fed was in no hurry to speed up its plans for policy tightening from what has been communicated, putting some downward pressure on the USD, which has rallied on the back of US rate hike expectations in recent weeks.

Macroeconomic: South African Rand rallies as dollar plunges   

One got a sense of just how overvalued the USD is. Using historical comparison, the USD is some 15-20% overvalued on a trade-weighted basis. Given just how much monetary tightening has been priced in, investors need to question how much more is justified on current information. Furthermore, Omicron may be causing havoc at the moment. Still, at the rate, it is sweeping through the global population, it is also building high levels of immunity in vaccinated and unvaccinated alike.

Furthermore, as investors position for a less risky financial market environment in the future, the need for a safe-haven destination has weakened considerably. The USD could still lose more of its appeal through the weeks ahead if the fourth wave of Omicron peaks and a more stable business environment follows. The current hope and building expectation is that the current rapid spread of Omicron together with its lower virulence, will render it endemic.

Stock markets had a much better day yesterday, and overall risk appetite has improved considerably. The USD has succumbed and broken down through key support, beginning what looks like a much deeper correction. Nothing in the inflation data yesterday or Fed Chairman Powell's comments this week have changed expectations much, and the USD is, therefore, left vulnerable to its overvalued position.

Domestically, there does not appear much that could derail this move. In fact, the defence of the judiciary and constitution by acting Chief Justice Zondo yesterday would help rather than detract from the appeal of the ZAR. Then there is also the recent rapid rise in commodity prices as reflected in the CRB indices, and the ZAR's terms of trade will have recovered to help support the trade, and current accounts remain comfortably in surplus. At the start of 2022, the ZAR looks set to surprise many with its degree of resilience.