What does the recent Fed rates hike mean for regional currencies?

The recent Federal Reserve's decision to raise interest rates by 25 basis points has sent shockwaves through the financial markets, with many regional currencies experiencing volatility. To shed light on the implications of the Fed rate hike on regional currencies, CNBC Africa sat down with Philip Ssali, the Head of Corporate Sales and Global Markets at Standard Bank Group. Ssali highlighted that while the rate hike was largely expected and priced in by the markets, it has already influenced currencies like the Uganda Shilling, Kenya Shilling, Tanzania Shilling, and the Randis Frank. Going forward, local demand and cyclical factors are likely to play a more significant role in shaping the direction of these currencies. He emphasized that the Fed's future actions are anticipated to be more balanced, with demand and supply dynamics becoming the primary drivers of regional currencies. Ssali addressed the impact of the rate hike on the cost of debt, pointing out that it has led to increased borrowing costs and could potentially crowd out domestic markets. When discussing the trend of weakening regional currencies against the dollar and the concept of dollarization, Ssali noted that while regional trade could reduce the dependency on the dollar, true dollarization remains a distant possibility given the global dominance of the dollar. The risks associated with moving away from the dollar include the need for a stable, liquid, and globally accepted currency, as well as the challenge of finding trading partners with complementary needs. Strengthening regional trade ties and boosting cooperation, such as through the African Continental Free Trade Agreement, could help alleviate pressure on regional currencies by reducing the demand for hard currency. Ssali also emphasized the importance of developing capital markets in Africa to provide alternative financing sources and attract investment. However, he highlighted the need to address structural challenges and improve investor perception to enhance the vibrancy of capital markets. Looking ahead, Ssali acknowledged the likelihood of higher global rates for an extended period, which could dampen investor interest in regional capital markets. Factors such as the path of interest rates and global economic performance will continue to influence the outlook for regional markets in the coming months, with the potential for challenges amid uncertain economic conditions. Despite the prevailing headwinds, Ssali remains cautiously optimistic about the long-term prospects for regional currencies and capital markets, emphasizing the importance of policy interventions and market reforms to navigate the evolving landscape.