Following our just completed General Election, let us investigate what local and international markets view about the results by peering into the Kenya shilling exchange rate against other currencies and what we can expect going forward.
The United States dollar decreased considerably over the past four months against the euro, British pound, and Swiss franc and slightly against the Japanese yen. The greenback’s decline stands in marked contrast with its rapid appreciation in 2016 into 2017.
The flood of demand for the dollar made it difficult for many central banks to shore up their own currencies. While the Kenyan shilling depreciated markedly against the dollar in prior years, our shilling did better than many other continental currencies during the 2016 into 2017 dollar strengthening as the dollar appreciated only slightly against the Kenyan Shilling in the same period.
Now, the US unemployment rate continues to decline, their equities markets hold at record levels, and GDP growth continues slowly but unabated.
So what precipitated the dollar’s recent decline? Typically equities and foreign exchange go hand-in-hand in that demand for equities generated from growth prospects usually lures international investors into a market thus propping up a currency. But in the United States now, one sees a booming equities market and a declining currency value at the same time.
The softening demand for the dollar originates from the return to stability and certainty in other world powerhouses along with political turmoil in America. The Chinese stock market has become more stable and not frightening off Chinese investors to the same degree as last year.
Japan persisted without major natural disasters weighing down government finances and global money laundering blacklisting from secrecy laws in Swiss banks was averted. No imminent euro crisis lingers in the clouds as in prior years and the European Central Bank is strengthening its monetary position.
Amidst global stability, the United States conversely faces political turmoil from a wildly unpopular president and fears over fallout from the Russian election tampering collusion investigation raises uncertainty concerns.
Most recently, the US currency market shudders at the thought of a less than zero chance of nuclear war with loony repressive North Korea. Should Americans lament the decline in value against their currency? Absolutely not. The decline stands as great news for their country.
Many investors see the return of stability in other world markets as bringing some normalcy to demand for the dollar and the ability of America to increase badly needed exports.
The high dollar hindered companies that export, but helped consumers of imported goods thus increasing the balance of payment imbalance.
On our side, Kenyan businesses should expect modest declines in textiles, agricultural commodities, and other exports to the United States commensurate with the change.
Interestingly, the dollar has not declined markedly against many Sub-Saharan African currencies such as the South African Rand, Tanzanian Shilling, Ugandan Shilling, and our very own Kenyan Shilling.
Also, the Kenyan shilling remained constant against the South African rand, Tanzanian shilling, and the Ugandan shilling during the past month in the lead-up to and after our General Election.
Since the Kenyan shilling did not appreciate or depreciate dramatically against major or regional currencies since the election, the local and international markets therefore expected the overall outcome of our general election and did not expect major unrest.
Remember that US President Trump’s unexpected win shot the dollar up substantially because the markets did not expect it and the assumed commensurate corporate tax breaks a Republican administration might bring.
Conversely, the sharp decline in the British pound followed the shock Brexit vote. Markets react strongly when the unexpected happens. But meeting expectations yields calm investor responses.
No matter what political angle you hold, investors value stability and predictability. As Kenyans, we delivered exactly what investors expected thus far. Inasmuch, we should expect an increase in international investment since investor uncertainty abated after the elections and results did not deliver a positive or negative shock.
Given the also declining dollar, Kenyan firms could more easily court American investors now eager to take advantage of our higher GDP growth and our more stable currency in the current market.
Scott may be reached on scott@ScottProfessor.com or on Twitter: @ScottProfessor.