Speculators disrupt EUR - XAF FOREX as CFA Franc readies devaluation

 

Forex trading in the EUR- XAF pair is heating up. The reason is the not so subtle signs that the CFA Franc will soon be devalued.

This is the currency used by former french colonies in Central and West Africa. It is made up of two Central banks, one in Central Africa, - BEAC and one in West Africa, - BCEAO.


In order to realign trade imbalances and make the area more competitive, monetary regulators are due to devalue the currency early next year. There was a devaluation of 50% of the CFA in 1994, that was more or less well managed, first with the refusal to chance CFA francs by the french monetary authority, then a ban on the external transfer of funds and finally, the devaluation.


With this round of devaluation, the currency is expected to lose about 40% of its value. Officially, it is pegged to the euro at a fixed rate with very minor fluctuations. But since rumors of the impending devaluation hit the internet and a flurry of not so secret meetings were held in Europe with the European Central bank, and  monetary authorities from the XAF and XOF zones, trading in these currencies has been on a roller coaster ride.


George Soros made a killing in 1992 when British authorities dragged their feet when it was evident that the pound sterling had to be devalued. This is what is happening to the XAF and XOF. All manner of speculators will frantically be dumping their francs and influx of new capital will dry up. Although not related, there is already an ongoing strike at the Douala maritime harbor which is one of the main entry points for landlocked countries like the Central African Republic. Public dissent and unrest will likely result as the price of food commodities and finished goods are usually affected both by speculation and the currency value.

If the devaluation of the CFA francs has to go on, it should be sooner rather than later. The countries may lose a few hundred million dollars from lost annual remittances, but if the big boys and hedge funds get into the game, the effect may be exactly the opposite of what the central bankers intended.