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Analysis-For West African juntas, CFA franc pits sovereignty against expediency

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Analysis-For West African juntas, CFA franc pits sovereignty against expediency
© Reuters. FILE PHOTO: Burkina Faso’s interim President Ibrahim Traore attends a meeting with Russia’s President Vladimir Putin following the Russia-Africa summit in Saint Petersburg, Russia, July 29, 2023. Alexander Ryumin/TASS Host Photo Agency via REUTERS/File Ph

By Joe Bavier and Boureima Balima

JOHANNESBURG/NIAMEY (Reuters) – Days after Burkina Faso, Mali and Niger announced last month they were quitting the West Africa political union ECOWAS, Burkina Faso’s military ruler Ibrahim Traore was already naming his next target: the region’s CFA franc currency.

“It’s not just the currency. Anything that maintains us in slavery, we’ll break those bonds,” the 35-year-old army captain turned coup leader said in an interview, posted on YouTube.

The three countries jointly announced on Jan. 28 they were pulling out of the Economic Community of West African States (ECOWAS) after it pressured them to restore constitutional order following a string of coups.

Having already kicked out French soldiers and rolled back a U.N. mission in Mali, these states have consistently shown they value sovereignty over expediency.

Their attitude towards the euro-pegged CFA franc appears no different, although economists and experts say dumping the CFA franc would be riskier and significantly more complicated than withdrawing from ECOWAS, a move seen as a bold, if potentially ill-advised, act of defiance.

Last November, the finance ministers of Burkina Faso, Mali and Niger said they would weigh the option of setting up a monetary union and top officials from all three countries have, to varying degrees, voiced support for abandoning the currency.

The head of the Niger junta, Abdourahamane Tiani, said in an interview on state television on Sunday that abandoning the CFA franc would be a sign of sovereignty and a necessary step in moving away from French “colonisation”.

To do so, however, would mean much more than simply printing new banknotes.

A newly created central bank would need to manage a delicate transition away from the CFA franc, formulate monetary policy, and decide what to do about more than $4.6 billion in outstanding CFA-denominated regional bonds.

‘THE FRENCH ROBBED US’

The CFA franc currencies – one West African and another for Central Africa – sit at the heart of an emotional debate over sovereignty and development in French-speaking Africa.

Proponents hail the CFA franc’s peg to the euro as a guarantee of macroeconomic stability in one of the world’s most volatile regions.

Critics denounce it as a brake on growth and an outdated vestige of French colonial rule: until a 2019 reform, countries were required to hold a portion of their foreign reserves with the French Treasury.

But never since its inception in 1945 has there been the prospect of such a mass exodus.

“The French have robbed us with the CFA franc. African countries must definitively break with this currency,” said Omar Issoufou, a 25-year-old Nigerien who is studying electrical engineering in the capital Niamey.

The military takeovers that have swept across the arid Sahel region were driven by anger over Islamist violence, which Mali’s U.N. mission and a sprawling French anti-militant operation had failed to snuff out.

Punishment for the putsches – the imposition of economic sanctions by ECOWAS, including freezing of some of Mali and Niger’s assets held by the regional central bank – fuelled tensions between the new regimes and the West African Economic and Monetary Union, known by its French acronym UEMOA.

“The moment UEMOA became a weapon of war … I can understand why these three countries moved to clearly free themselves from their engagements towards the Union,” Hamma Hamadou, a former head of Niger’s tax authority, told Reuters.

Beyond ideological issues of sovereignty and practical concerns related to sanctions, some view moving away from the CFA franc as an opportunity.

“The CFA franc has been very detrimental to these countries over the long run,” said Ndongo Samba Sylla of International Development Economics Associates, a network of economists focused on the Global South. “They have lower inflation and extra exchange rate stability, but they’ve suffered from an over-valued currency.”

All three countries have largely agricultural economies. But their inability to set monetary policy has left their exports uncompetitive, he said, and hindered industrial development.

The peg to the euro, meanwhile, makes little sense when the bulk of West Africa’s external trade is done in dollars, he added.

‘GREAT DEPRESSION’

Withdrawing from ECOWAS is already looking easier said than done. Disentangling their economies and finances from UEMOA will be even more delicate.

UEMOA’s eight members deposit their foreign exchange reserves with the Dakar-based regional central bank. Those reserves are mutualised as are liabilities, making a determination of how much each country would be able to walk away with a difficult calculation.

Then there’s the question of CFA-denominated debt. Burkina Faso has over 1.2 trillion CFA francs ($1.99 billion) in outstanding bonds. Mali has slightly over 1 trillion CFA francs, while it’s 498 billion CFA francs for Niger.

“We will enter into a zone of turbulence if these countries pull out,” said one financial expert involved in regional debt issuances, who asked not to be named due to market sensitivity.

There was no clarity, he said, on where the bonds would be listed, whether they would remain in CFA francs or even if the new currency would be convertible.

“There would be a lot of problems for the holders of these sovereign bonds,” he said.

The turmoil would likely leave the three states cut off from future financing from regional and international capital markets, experts said. Burkina Faso already called off a bond auction in the wake of its ECOWAS withdrawal announcement due to a lack of interest.

Uncertainty could provoke capital flight and an immediate depreciation of a new currency. Imports could become prohibitively expensive, fuelling run-away inflation.

“I think you’re taking 10% to 20% off your GDP,” said Charlie Robertson, head of macro strategy at London-based FIM Partners. “Leaving the single currency is bringing on the Great Depression,” he said, adding it would be the worst policy mistake the countries could make.

In light of these risks, the juntas are approaching the currency question more carefully than their ECOWAS withdrawal.

Two government officials from the countries told Reuters that the committee charged with studying a new monetary union, while still planned, had not yet met.

Prime Minister Choguel Maiga of Mali – the only one of the three to have ever issued its own currency – has urged patience.

When Mali exited UEMOA in 1962 in the wake of independence, its new currency was at parity with the CFA franc, but upon its return to the union in 1984 was worth only half as much.

To ensure lessons have been learned, Maiga says the committee needs time to assess all the implications before the country draws up plans for a new currency with its two neighbours.

“This is what I say to the Malians,” Maiga told business leaders last month. “Sure, you have this passion. You want it. But this is strategic.”

($1 = 604.0000 CFA francs)

Forex

Dollar firms, euro slips ahead of key inflation data

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Dollar firms, euro slips ahead of key inflation data
© Reuters

Investing.com – The U.S. dollar firmed in early European trade Wednesday, shrugging off signs of U.S. economic weakness ahead of the release of this week’s key inflation data as traders look for clues as to when the Federal Reserve will start cutting interest rates.

At 04:00 ET (09:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher at 104.080. 

U.S. inflation to prove sticky?

Data released on Tuesday showed that orders for U.S. fell a hefty 6.1% last month, while the Conference Board’s was revised lower for January and declined further in February. 

However, these signs of economic weakness have had little impact on the U.S. currency with all eyes on the , the Fed’s favorite inflation gauge, due on Thursday. 

Economists are expecting a 0.4% increase for January after 0.2% in the previous month. A stickier-than-expected reading could prompt the Fed to delay rate cuts further.

“We remain of the view that evidence of resilient inflation in the Fed’s preferred measure of inflation will offer more support to the dollar into the end of the week,” said analysts at ING, in a note.

Markets have largely priced out a rate cut at both the Fed’s March and May meeting, and the chance of a cut in June is seen as largely 50:50.

Before the PCE data, a second reading on fourth-quarter is due later on Wednesday, while there are more Fed officials due to speak, including , and .

Euro edges lower ahead of eurozone CPI

In Europe, traded 0.2% lower at 1.0818, with Europe also looking forward to its own slew of inflation reports, with Germany, France and Spain scheduled to release price data on Thursday ahead of the on Friday.

Economists are expecting an annual reading of 2.5% for February, dropping from 2.8% in January.

Still, the dollar trade continues to dominate, and this inflation release will have to provide a major surprise to influence the pair substantially.

“EUR/USD continues to follow the dollar dynamics without showing any material impact from eurozone-specific drivers. The pair looks likely to test 1.0800 in the coming days, in our view,” ING added. 

traded 0.4% lower at 1.2635, with sterling hit by a stronger dollar and after recent data showed U.K. grocery prices rising at their lowest rate since March 2022.

Kiwi dollar slumps after RBNZ meeting

In Asia, fell 1.1% to 0.6103, near a two-week low, after the held interest rates steady at 5.5%, but flagged more progress in inflation moving towards its 1% to 3% annual target. 

While the bank still signaled that it will keep interest rates higher for longer in the near-term, its comments saw traders largely price out expectations of any more rate hikes.

traded 0.2% higher to 150.80, with the yen weakening further beyond the 150 level, although steeper losses were limited by the prospect of early interest rate hikes and government intervention.

traded largely unchanged at 7.1993, as traders awaited the release of key for February, due this Friday. 

 

 

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Forex

Dollar slips vs yen after Japan inflation data, US durable goods

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Dollar slips vs yen after Japan inflation data, US durable goods
© Reuters. FILE PHOTO: U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Caroline Valetkevitch

NEW YORK (Reuters) -The dollar eased against the Japanese yen on Tuesday after data showed Japan’s core consumer inflation exceeded forecasts while U.S. durable goods orders fell more than expected in January.

Overnight data out of Japan kept alive some expectations that the Bank of Japan might end negative interest rates by April.

In the U.S., the Commerce Department’s Census Bureau said orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, tumbled 6.1% last month, exceeding the 4.5% decline forecast by economists polled by Reuters.

Markets have recently pulled back expectations on the timing and size of Federal Reserve rate cuts this year as the U.S. economy remains strong and inflation pressures stubborn.

Against the yen, the dollar dipped 0.1% to 150.56, while the , which measures the currency against a basket of peers, was last up 0.08% at 103.86.

“Inflation numbers have been drifting a bit lower in Japan over the past few months, but today’s numbers did suggest inflation is sticky even in Japan,” said Shaun Osborne, chief currency strategist at Scotiabank in Toronto.

“It probably does mean we’ll get a mild series of rate increases in Japan in the next few months.”

hit a two-year high on signs large players were buying the cryptocurrency.

Bitcoin was last up 5.22% at $57,513, while ether rose 2.26% at $3,258.

In other U.S. economic news, the consumer confidence index slipped to 106.7 this month – short of forecasts – from a downwardly revised 110.9 in January.

The U.S. core personal consumption expenditures (PCE) price index, due on Thursday, is expected to be one of the more important reports of the week for the market. Forecasts are for a rise of 0.4%.

“We’re waiting for the PCE data to give us a stronger sense of direction perhaps,” Osborne said. “I think we’re prepped for slightly stronger numbers; it probably at this point would have to be a big upside surprise to really get the dollar strengthening.”

The euro was last down 0.1% versus the greenback. It has been rising since mid-February, when it hit its lowest since Nov. 14.

Analysts said the single currency strengthened as markets scaled back bets on future European Central Bank rate cuts to 90 bps by year-end, amid encouraging signals from the economy, which supports expectations for a pick-up in growth in the second half of 2024.

German states, France and Spain will release inflation data on Thursday ahead of the euro area’s figures due on Friday.

ECB officials have sounded more cautious about a quick easing of monetary policy, with President Christine Lagarde saying wage growth remains robust, while ECB dove Yannis Stournaras ruled out a rate cut before June.

The dollar strengthened 0.06% at 7.214 versus the offshore . The People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1057 per dollar.

The weakened 0.06% versus the greenback at $0.617, with traders gearing up for what could turn out to be a significant policy meeting by the Reserve Bank of New Zealand (RBNZ) on Wednesday.

Markets are pricing in a one-in-three chance the RBNZ will raise its 5.5% official cash rate to combat stubborn inflation.

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Dollar firmer before key inflation data, kiwi sinks as RBNZ holds rates

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Dollar firmer before key inflation data, kiwi sinks as RBNZ holds rates
© Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

By Samuel Indyk and Brigid Riley

LONDON (Reuters) -The dollar firmed up on Wednesday as markets awaited a raft of global inflation data for clues on when central banks may start easing policy, while the New Zealand dollar tumbled after its central bank trimmed its forecast for a peak in rates.

The was also hanging at its lowest in over a week after inflation data came in softer than expected, reinforcing expectations that domestic interest rates are unlikely to increase further.

The data calendar looks light on Wednesday so analysts said markets were likely to focus on consumer inflation data from the U.S., Germany, France and Spain on Thursday ahead of euro area figures due on Friday.

“There’s more chance of disinflation ongoing in the euro area, which perhaps could open the door for an earlier cut from the European Central Bank,” said Danske Bank FX and rates strategist Mohamad Al-Saraf.

“We think if inflation is stickier in the U.S. than it is in the euro area then the dollar has to be strong.”

Higher-than-forecast inflation in the U.S. has prompted markets to trim bets on the number of rate cuts expected from the Federal Reserve this year, while the chance of a cut in June now stands at around 60%. At the start of the year, markets were almost fully pricing a rate cut in March.

That repricing has pushed the U.S. currency higher in 2024, including against the euro. The single currency was last down 0.3% against the dollar at $1.0815.

The , which measures the currency against six others including the euro, was last up 0.2% at 104.07, having risen 2.7% year-to-date.

With market expectations more closely aligned with the Fed’s latest projections and comments, traders would only respond if they see a trend break in tier one data, especially anything “hinting at growth weakness,” said Charu Chanana, head of currency strategy at Saxo.

New Zealand’s central bank held the cash rate steady at 5.5%, catching markets by surprise as policymakers said the risks to the inflation outlook have become more balanced.

The RBNZ also trimmed its forecast cash rate peak to 5.6% from a previous projection of 5.7%.

“With a cash rate at 5.5%, the 10 basis points of wriggle room is simply there to remind us that they’ll hike if they need to but the bias is that they probably won’t,” said Matt Simpson, senior market analyst at City Index.

The slid over 1% to its lowest since Feb. 16 at $0.6093 in response.

The Australian dollar also fell after data showed inflation at an annual pace of 3.4% in January, unchanged from December and under market forecasts of 3.6%.

Although inflation remains above the Reserve Bank of Australia’s (RBA) 2-3% target, “it is close enough to expect the RBA to hold rates steady,” said Simpson.

The Aussie was last down 0.6% at $0.6502.

Elsewhere, sterling weakened to $1.2657, down 0.2%, while the yen slipped 0.1% versus the greenback to 150.595.

“We’ve seen in the past when dollar-yen trades above 150 that authorities start to give increased attention to the currency,” Danske Bank’s Al-Saraf said.

“But I would say right now there’s probably not intervention risk unless we see a sharp move in the yen again.”

In cryptocurrencies, bitcoin was last up over 4% at $59,200, extending to its highest level since November 2021.

Ether rose 2% to $3,320.

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