How currency futures would guarantee profits for Kenyan exporters
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 against the US.
Expectations of its economy rebounding after turning the corner from Covid-19 now look slimmer. But while this is happening, the same scenario applies to the Kenyan shilling.
The loss in value of the Euro against the local currency (loss of more than 6% since the start of the year) means that the shilling has strengthened and this could put many Kenyan exporters in a difficult situation.
Why? If the shilling becomes too strong, our goods may become more expensive for buyers in Europe. And if Kenyan exports decline, this could pose additional challenges to the local economy given our level of activity.
The EU is an important trading partner for Kenya, representing the largest export market with 21.1% of Kenya’s total exports to the world.
Exports to the EU are mainly agricultural products: tea, coffee, cut flowers, peas and beans. Over 70% 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 main providers of development aid to Kenya.
As a region, the EU is the largest trading bloc in the world, accounting for around 15% of global exports and imports. His slow is a double-edged sword.
Generally, the Euro was vulnerable due to the Russian invasion of Ukraine, which led to higher oil and natural gas prices. Indeed, Europe is much more dependent on Russian oil and natural gas to run its industries.
Fears that the war in Ukraine will lead to a loss of Russian oil on world markets have driven up oil prices. Worse still, Russia has reduced the supply of natural gas to the EU.
In July, energy prices had pushed inflation in the euro zone to a record high of 8.9%. This has led to mounting fears that governments will need to ration natural gas to industries if Russia further reduces or closes gas taps.
Can this scenario turn into a victory? Yes, indeed, through currency futures. Kenyan exporters can hedge against the current risk and thereby secure their trading profits. In this context, they would “sell short” a EUR/KES contract, and thus benefit from the rise of the local currency.
And because futures contracts have standardized sizes and settlement dates, any unhedged excess exposure can be managed through forward foreign exchange contracts with local banks. For speculators, a similar thing happens.
Interestingly, September 1992 (exactly 30 years ago) was a month that currency speculators will not easily forget. This is when George Soros, the legendary Quantum fund trader, scored $1.5 billion in a month playing the currency markets following the turmoil in European markets.
Given the premise of volatile forex markets, it makes sense that exposure management tools are made available, for both the exporter/importer and the speculator.