For the first time in 20 years, the euro plunged below parity with the dollar ending a one-to-one exchange rate with the US currency. The level is what traders call a “psychological barrier” and the break below means Europe’ is fading vis a vis the United States.
Expectations of its economy rebounding after turning the corner from Covid-19 now look slimmer. But as that is happening, the same scenario applies to the Kenya shilling.
Euro loss in value against the local currency (lost more than six percent year to date) means the shilling has strengthened and that may put a lot of Kenyan exporters in a tight spot.
Why? If the shilling becomes too strong, our goods may become more expensive for buyers in Europe. And if Kenyan exports decrease, that could further pose challenges for the local economy considering our level of business.
The EU is a significant trading partner to Kenya, representing the biggest export market with 21.1 percent of Kenya's total exports to the world.
Exports to the EU are mainly agricultural products: tea, coffee, cut flowers, peas and beans. More than 70 percent of Kenya’s total flower production is exported to the EU, creating 500,000 direct and indirect jobs for Kenyans. Moreover, the EU and its member States are the biggest providers of development assistance to Kenya.
As a region, the EU is the biggest trading bloc in the world, accounting for around 15 percent of global exports and imports. Its slowdown is a double-edged sword.
Generally, the euro has been vulnerable due to the Russian invasion in Ukraine and that’s leading to higher oil and natural gas prices. This is because Europe is far more dependent on Russian oil and natural gas to keep its industries humming.
Fears that the war in Ukraine will lead to a loss of Russian oil on global markets have raised oil prices. Worse, Russia has been cutting back natural gas supplies to the EU.
As of July, energy prices had driven euro-area inflation to a record 8.9 percent. This has led to a rise in fears about governments needing to ration natural gas to industries if Russia further reduces or shuts off the gas taps.
Can this scenario be turned into a win? Yes, indeed, through currency futures contracts. Kenyan exporters can hedge against the current risk and thus guarantee their commercial profits. In this context, they would “sell short” a EUR/KES contract, and thus benefit from the upside in the local currency.
And since the futures contracts have standardised sizes and settlement dates, any unhedged excess exposure can be handled via currency forwards with local banks. For speculators, a similar thing happens.
Interesting, September 1992 (exactly 30 years ago) was a month currency speculators won’t easily forget. This is the time that George Soros, the legendary trader of Quantum funds, scored a cool $1.5 billion inside one month playing the currency markets as a result of the upheaval in Europe's markets.
Given the premise of volatile currency markets, it makes sense that tools for managing exposure are made available, for the exporter/importer and the speculator.