African currencies: Currency trading in Africa has grown dramatically in recent years, as the continent’s economies have increased and become more integrated into the global financial system. The majority of currency trading in Africa is conducted over the counter (OTC) through banks, financial institutions and Forex brokers. Forex or FX, and also known as foreign exchange, is the largest market in the world. It should be mentioned that while the FX market is the most liquid, the African currency pairs are not as frequently traded as majors such as EUR/USD, GBP/USD, and others. However, African traders that have a better understanding of their local economies and currencies, trade some of the most active African pairs.
There are two major ways to predict future currency pair prices. Some traders use technical analysis, others solely use fundamental analysis, while some are using both simultaneously. For conducting a fundamental analysis FX major events calendar is essential.
Most traders choose to trade the most liquid currencies as this way they can limit the size of spreads.The African continent has a variety of countries, but the most traded currencies are:
- South African Rand (ZAR): The currency of South Africa is the most traded currency in africa. It has a daily turnover of more than 50 billion USD The currency is also widely used in Namibia, Lesotho, and Eswatini. South African Rand is a commodity currency, which means that its value is heavily influenced by export of major commodity prices such as gold, diamonds, and other minerals. As a result, changes in commodity prices can have a significant impact on the Rand’s value. Due to global inflation, prices on commodities have increased, on the other hand, South Africa has experienced the Covid-19 pandemic, high inflation, and increased interest rates similarly to other nations. The year 2023 is going to be a difficult year for African countries due to additional factors, such as Russia’s war in Ukraine, global warming, and fears of pandemic returning. However, ZAR is going to be the best prepared for the challenges due to its heavy reliance on commodity prices.
- Nigerian naira (NGN): The currency of Nigeria is the second most traded currency in the African continent. It has a daily turnover of more than 10 billion USD. This currency is also used as a reserve currency in many African countries. The Nigerian naira is also a commodity currency, as Nigeria is a major oil exporter. Therefore, changes in global oil prices can have a significant impact on the NGN’s value. Other factors that could impact the naira’s valuation include, the country’s political and economic stability, inflation rates, and interest rates. Similarly to the ZAR, NGN is well prepared for the upcoming challenges, as oil price is predicted to remain high.
- Egyptian pound (EGP): The currency of Egypt is the third most traded currency in Africa, with a daily turnover of more than 5 billion USD. This currency is also used in North Africa. The Egyptian pound is also a commodity currency, as Egypt is a major producer of energies such as oil and natural gas. As a result, changes in oil and gas prices can have a significant impact on the EGP’s value. Other factors that could affect the pound’s value include: the country’s political stability, inflation and interest rates. In recent years, Egypt has implemented significant economic reforms in order to reduce the budget deficits, stabilize inflation, and attract foreign direct investments (FDI). These factors have been positively viewed by the investors and global financial institutions, which can greatly help the currency get stronger. The prediction for the Egyptian pound remains bullish for 2023.
- Tunisian dinar (TND): The currency of Tunisia is the fifth most traded currency in Africa. It has a daily turnover of more than 2 billion USD and is also used in North Africa. The Tunisian dinar is a stable currency. The currency’s stable value is heavily influenced by the country’s political and economic stability. Tunisia has been working hard to implement economic reforms in order to reduce budget deficits, promote economic growth, and attract FDI. The country is a significant exporter of soft commodities such as textile and agricultural products, and therefore, changes in global demand for these products can impact on the dinar’s value.
- Kenyan shilling (KES): The currency of Kenya is the seventh most traded currency in Africa. It has a daily turnover of more than a billion USD and is used in East Africa. Just like the majority of other most traded African currencies, KES is a commodity currency. The country is a major exporter of soft commodities such as tea and coffee. Changes in global demand for these commodities can significantly impact the KES’s value. It should also be mentioned that in recent years, Kenya has been implementing significant economic reforms to promote growth and prosperity of regular Kenians. The Covid-19 pandemic has had a significant impact on the country’s economy. And its effects are likely to be felt in 2023.
Factors that influence all currencies across the African continent
Each country on the African continent has its unique characteristics, however, many of them have things in common. Global warming affects all African countries, by limited productivity in agriculture. This results in weaker local currencies. In addition, prices on food and commodities are rising globally. And this makes the situation worse. On one hand African nations can’t produce more food due to droughts, on the other hand, they have no other choice but to buy food with increased price tags from other countries. The lack of infrastructure, political instability, and global economic conditions are also affecting African currencies.
The African countries are in a tight spot for 2023. However, there are many opportunities on the continent. As already mentioned, many African countries are exporters of natural resources, such as diamonds, gold, gas, and oil. The African continent is the perfect place for renewable energy such as solar. And prices on solar panels are decreasing each year. Advancements in technology, implementing better irrigation systems, and better civil infrastructure can boost the African economy.
Population growth in Africa and ways this could impact currency valuation
Africa has experienced a significant population growth in recent years, and this is projected to continue in 2023. According to the United Nations, Africa’s population was around 1.3 billion in 2021 and is projected to grow to 2.5 billion by 2050.
The reasons for Africa’s population growth are multifaceted, but the primary reasons are: improved healthcare, increased life expectancy, and greater fertility rates. What does population growth mean for the African economies and their respective currencies? Some believe that an increase in population is bad because there will be more mouths to feed, more people will be in need of housing and healthcare. While others see opportunities. African countries are growing in population, while European countries, Japanese, Chinese and others are decreasing in numbers dramatically. Africa is viewed as a place with cheap labor that could attract foreign direct investments. China used to be a place with cheap labor and massive opportunities. However, due to the fact that the labor costs for companies is no longer small and the population is decreasing, investors are looking for countries that can replace china. However, this will not be an easy task, as China has already developed trade routes, and production lines masterfully. Another factor that makes this whole situation uncertain is increased automation. It’s becoming easier and easier for companies to replace humans with robots on the production lines. If Africa attracts more FDI and starts consuming its rich natural resources to produce the end product, the economy and therefore local currencies will be strong. On the other hand, failure to do so will be devastating for the local economies.
Summary
To sum everything up, the most traded African currencies are: South African Rand (ZAR), Nigerian naira (NGN), Egyptian pound (EGP), Tunisian dinar (TND), and Kenyan shilling (KES). Most of these currencies are commodity currencies, which means their value is largely impacted by the price of commodities. The African continent is projected to experience an even more increase in population and some challenges such as global warming, increased food prices and so on. However, there are also many opportunities, such as advancements in technology for improved irrigation, use of renewable energy, and transforming African countries from exporters of raw commodities to exporters of finished goods. Africa has natural and increased human resources, while birth rates are decreasing globally.