It has been a turbulent start to the year since WHO declared the Covid-19 outbreak as a pandemic- we have seen the virus spread not just through people, but also through economies.
As we are looking at the Kenyan Shilling against the U.S Dollar- I will take you through what is being factored into the exchange rates currently. However, before that, let us look at where we began this year. USD/KES was trading at 100-101 before the outbreak, at a steady level.
As Covid19 begun spreading, many Central banks took action very quickly, one of the first being the Fed, who cut interest rates down to 0% in response and essentially announced unlimited QE (Printing of money). Usually, QE would mean that a currency is devaluing, as you are creating more supply- however, it seems that this is not the effect that it has had on the U.S Dollar.
The reason for this, is that the U.S Dollar is historically a safe haven currency- which investors flock to at times of uncertainty, similar to Gold (Which we saw rise to over $1700 recently). It is for this reason, that even though the Dollar, by right, SHOULD be weak- it is still the strongest currency right now, and will continue to be during this turbulent time on the market. The U.S economy is struggling, jobless claims are growing every week, and it seems likely at this point that reopening the country too early will likely result in a second wave of the virus- but this is not affecting traders betting on the Dollar- even when Oil dropped to historic lows recently, the only winner was the U.S Dollar. Please see below for a chart from February to now on USD/KES. You will see that the market has risen from 100.00 to 1.0690 in a matter of two months- highest exchange rates we have seen since 2015.
Another reason why the exchange rate has risen so much is that the Kenyan central bank cut interest rates by 1% in March in response to the coronavirus- cutting rates usually weakens a currency, and in this case, that came into fruition very quickly. Kenya’s parliament has also approved a cut to corporate income tax to help the economy through this period and taken other fiscal measures to help stabilise the economy. The Kenyan central bank will be meeting again on April 29th, where we may see another interest rate cut or a monetary policy update. Coronavirus has hit the Kenyan economy rapidly, and this is evident in the Central Bank’s response. With a weaker currency, it will be more expensive for Kenyan importers to purchase goods, which is negative as Kenya is a net importer- and pays for most of its imports in the U.S Dollar- so the exchange rate fluctuation will take a toll on the economy.
Moving forward, it is unclear how long this pandemic will last, and how bad an upcoming recession will be- but we are at historic levels on the Kenyan Shilling- which have presented fantastic opportunities for anyone buying KES from USD.
If you would like further information on how to manoeuvre the market- please don’t hesitate to contact me.