Forex
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)
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The yen edged lower from a 2-1/2-month high against the U.S. dollar on Thursday, as financial markets stabilized, with investors looking ahead to next week’s Bank of Japan meeting which could see a potential rate hike.
The Japanese unit this week rallied sharply as market participants unwound their long-held bets against the currency. At the same time, a plunge in global stocks in recent sessions had driven investors toward traditionally safe assets such as the Swiss franc and yen.
U.S. equities, however, recovered on Thursday after a steep sell-off in the previous session.
For the week, the yen has risen 2.4%, on track for its best weekly gain since late April. The greenback was last slightly down at 153.84 yen.
The dollar, however, trimmed losses against the yen and euro after data showed the world’s largest economy expanded faster than expected and inflation slowed in the second quarter. That reduced brewing expectations of a larger-than-expected rate cut in September, or a sudden Federal Reserve easing at next week’s meeting.
“The Japanese yen is flatlining on diminished safe-haven demand, and the speculative fervor behind its recent bull run seems to be running out of steam,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“We think markets have gotten a little too far over their skis given that underlying economic fundamentals don’t yet support a rapid tightening cycle from the Bank of Japan, and that rate differentials will remain wide even if the Fed begins cutting in coming months.”
The rate futures market has priced in a 67.2% chance that the BOJ will raise rates next week by 10 basis points (bps), up from about 40% earlier in the week, according to LSEG estimates.
The euro was slightly up against the dollar at $1.0846 , with the flat at 104.36. The index was at 104.21 just before the release of economic growth data.
Advance estimates showed that U.S. gross domestic product (GDP) grew at a 2.8% annualized rate in the last quarter. Economists polled by Reuters had forecast GDP rising at a 2.0% rate.
The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased at a 2.9% rate after surging at a 3.7% pace in the first quarter.
Against the Swiss franc, the dollar dropped 0.5% to 0.8806 francs.
AHEAD OF ITSELF
“The market got ahead of itself on Fed cuts. Before the GDP number, the market is pricing as if the Fed is going to cut 50 basis points in September,” said Marc Chandler, chief market strategist at Bannockburn Forex in New York.
He also cited comments from former New York Fed President Bill Dudley in a Bloomberg column on Wednesday, who said the Fed should cut rates next week, citing recent employment data.
“The GDP number shows that the Fed is not under that kind of urgency,” Chandler said.
The Fed remains firmly on track to cut interest rates in September, according to fed funds futures data. The futures market has also priced in about 68 basis points (bps) of cuts this year, based on LSEG calculations.
U.S. jobless claims data were also consistent with an economy still holding up well.
Initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 235,000 for the week ended July 20, the data showed. Economists polled by Reuters had forecast 238,000 claims for the latest week.
The only blemish, however, was the U.S. durables report, which showed durable goods orders fell 6.6% in June on slumping transportation orders, compared with expectations for a 0.3% rise.
In other currencies, the Australian dollar fell to US$0.6519, its lowest since early May. It was last down 0.6% against the greenback at US$0.6541.
rallied against the dollar, which fell to its lowest since early May at 7.205, as the yen’s rally spilled over to the Chinese unit. The dollar was last down 0.2% at 7.245
Currency
bid
prices at
25 July
07:28
p.m. GMT
Descripti RIC Last U.S. Pct YTD Pct High Low
on Close Change Bid Bid
Previous
Session
Dollar 104.31 104.38 -0.05% 2.90% 104.45 104.
index 07
Euro/Doll 1.0852 1.084 0.12% -1.68% $1.087 $1.0
ar 829
Dollar/Ye 153.9 153.86 0.01% 9.09% 154.3 151.
n 96
Euro/Yen 1.0852 166.79 0.13% 7.31% 167.59 164.
83
Dollar/Sw 0.8806 0.8852 -0.53% 4.62% 0.8854 0.87
iss 78
Sterling/ 1.2861 1.2906 -0.33% 1.08% $1.2913 $1.0
Dollar 829
Dollar/Ca 1.3808 1.3808 0% 4.16% 1.385 1.37
nadian 97
Aussie/Do 0.6549 0.6582 -0.46% -3.92% $0.6582 $0.6
llar 511
Euro/Swis 0.9554 0.9594 -0.42% 2.89% 0.9598 0.95
s 22
Euro/Ster 0.8435 0.8397 0.44% -2.69% 0.8439 0.83
ling 95
NZ 0.5893 0.593 -0.68% -6.8% $0.593 0.58
Dollar/Do 73
llar
Dollar/No 11.0151 11.0265 -0.1% 8.68% 11.1381 10.9
rway 83
Euro/Norw 11.9548 11.953 0.02% 6.49% 12.0856 11.9
ay 317
Dollar/Sw 10.8111 10.7772 0.31% 7.39% 10.8685 10.7
eden 65
Euro/Swed 11.7314 11.6822 0.42% 5.45% 11.7786 11.6
en 784
Citi highlighted the Japanese yen’s major support level against the US dollar, noting that the pair had maintained its position above the 152 mark.
This level was previously identified as a significant resistance point throughout 2022 and early 2023, and it served as a crucial breakout area in 2024. Additionally, the 200-day moving average (200dma) is positioned just below this threshold at 151.54.
The firm observed that the stronger-than-expected US GDP and Core Personal Consumption Expenditures (PCE) figures released today, coupled with their anticipation of a hawkish Federal Reserve and no change in policy from the Bank of Japan (BoJ), present an attractive risk/reward scenario for investors considering tactical long positions in the USDJPY pair heading into next week.
Citi clarified that this recommendation is tactical in nature, given their broader expectation of a risk-off environment with heightened volatility over the coming months. They suggest that while high volatility can lead to aggressive counter-trend movements, it is also an opportunity to capitalize on.
Looking ahead, Citi anticipates better opportunities to sell the USDJPY pair, which may arise soon. They speculate that a rally to the 55-day moving average (55dma), which stands at 157.75, could offer appealing levels for selling if it materializes.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com – The U.S. dollar slipped lower Thursday, the euro posted small gains while the Japanese yen climbed to multi-month highs ahead of next week’s Bank of Japan meeting.
At 05:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.2% to 103.950, extending an overnight decline.
Dollar slips ahead of GDP data
The dollar retreated Thursday, extending an overnight decline amid increasing confidence that the will cut interest rates in September.
data for the second quarter are due later in the session, and is expected to show annualized growth of 2.0%.
This would be above the 1.4% growth seen in the first quarter, but would remain considerably slower than the 4.2% pace seen in the second half of last year.
The release will also show inflation slowed considerably last quarter, with the GDP price index falling to 2.6% from 3.1%, ahead of Friday’s price index data, the Federal Reserve’s favored gauge of inflation.
The Fed is set to meet next week, and is widely to keep interest rates steady while signaling a rate cut in September.
German business morale falls again
In Europe, rose 0.1% to 1.0847, with the euro edging higher despite German business morale unexpectedly falling in July, the third consecutive decline in Germany’s most prominent leading indicator..
The Ifo institute said its sank to 87.0 in July from 88.6 in June.
“The German economy is stuck in the crisis,” said Ifo president Clemens Fuest.
The kept interest rates on hold at 3.75% last week, but markets are pricing in just short of two more ECB rate cuts for the rest of this year.
traded 0.2% lower at 1.2885, falling back from the 1.30 level ahead of next week’s Bank of England policy-setting meeting.
UBS expects the central bank to trim interest rates in what is widely seen as a close call as to when it will start what is likely to be a slow and steady reduction path.
Yen goes from strength to strength
In Asia, fell 0.7% to 152.72, with the pair falling to its weakest level in 2-1/2 months as traders abandoned short yen bets in the run up to the BOJ’s July meeting in the wake of suspected currency market intervention by the Japanese government.
The is expected to consider a 10 basis point hike, and could unveil a plan to roughly halve bond purchases in coming years.
“USD/JPY has now corrected 6% off its high. This has proved another successful intervention campaign for Japanese authorities,” said analysts at ING, in a note.
“We think the success of the intervention has had less to do with the size of the FX sales and more to do with the timing. As was the case in September/October 2022, Japanese FX intervention has been timed to coincide with a dovish reappraisal of Fed policy. Very clever.”
slipped 0.5% lower to 7.2281, but remained near an eight-month high amid persistent concerns over a slowing economic recovery in the country. Surprise rate cuts by the People’s Bank added to pressure on the currency and did little to lift spirits over the Chinese economy.
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