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.

Devaluation of the CFA Franc (XAF and XOF) in January 2011

The news is out, don't say you were not warned, in January 2012 or maybe sooner, the CFA franc will be devalued.

The last time this happened, it took most Africans by surprise. In August 1993, the French Central bank refused exchanging CFA Francs, then a month later, currency transfers from the CFA Zone countries was limited, if not banned completely and in early January 1994, the CFA lost 50% of its value.

The population living in the areas of Africa that used this currency had a long stretch of desert to cover after seeing their savings wiped out, and their sovereign debt double overnight. Smart and quick moving businessmen and officials made a killing, transferring huge sums of money out of the CFA Zone, and then back once the dust had settled.

Meanwhile, officials in the Finance ministries denied any claims of devaluation to stem capital flight. 

The paradigm has now shifted. In a world of 24 hour news cycles, proletarian internet access, instant telephone connectivity and widespread e-business practices, it is hard to keep secrets for long.

Anyone who has not been living under a rock or in the Amazon has heard and seen the travails of the Euro, to which the CFA is pegged. The growing OWS (Occupy Wall Street) movement has led to riots worldwide. Africa is not spared from this global economic chaos. The citizenry in poor African countries is spared the minutiae of macroeconomics and globalization. Their leaders prefer them uninformed, so they are easier to manipulate and control. This is like having cancer, with three months left to live and your doctor does not inform you.

In their genteel world of artificial bliss, they are not aware of the huge deficits many of their governments have run up. Cameroon recently issued a bond offer to raise CFA 50 billion in funds, ostensibly for some infrastructural projects. It may be a lame attempt to sucker in some investors who will soon realize they are holding junk bonds when the CFA gets devalued. But we have to give it to that country's economy and finance minister for trying to stick it up to the MAN.

It is too late for some who have sent thousands of dollars to Africa for the end of year holidays. This time of year is historically when the Dollar to Euro parity is lowest, and ultimately you get less bang per buck. It may be more sensible to wait until late January 2012 to send cash to Africa, for you will get more of the devalued CFA per dollar or Euro.

Nigeria is being open, and its central bank governor Lamido Sanusi has publicly stated that the Naira will be devalued 3%-5% in 2012. 

And a final word, African leaders need to be more transparent in their dealings with the citizens of their countries. If people could understand how much of a deficit their country has, see its changes over time and how it impacts their daily lives, they will be more willing to work hard and make a fair share of sacrifices to help their country grow. Bad leaders will be exposed (most of the CFA country leaders are) and get voted out of office so this is clearly not going to happen in Africa.

Therefore, what it comes down to is a situation where every man fights for himself. Do yourself a favor, keep all of your money out of the CFA countries until the currency gets devalued, which is what's going to happen in about 30 days. The cat is out of the bag, and the devaluation may come much sooner rather than later. You have been warned.