Breaking down XOF/USD oscillations in a climate of critical adversities and acute conflict

By Malaika Cornelio & Nathan Nowbuth

The national and international agenda has been severely cramped for policymakers and heads of state as of late; this arguably commences from the world’s gradual descent towards what can be termed as one of this century’s most disruptive global public health crises. Nevertheless, despite the raucous nature of the world’s proceedings, the movement of the XOF/USD pair reveals an interesting trail that delineates latent events and factors which may characterise a gradual intensification in the movement of the XOF against the USD.

With a general move towards selling, the XOF’s value against the USD has shot up by 8.22% over the span of a year (March 2020-2021), most notably between July to August last year, coinciding with the massive global adjustment to the COVID-19 pandemic, including the imposition of lockdown restrictions, quarantine rules and the scramble to increase hospital capacity. The rise of XOF/USD can be imputed to turmoil within the US and the deficient administrative decisions undertaken by the Trump administration-era policies around that period, notably in response to the pandemic. This is delineated by its position as the country with the most COVID-19 deaths at 547, 234 people[i]. Further negative news coverage on the US’ administrative affairs, from the long-winded delay of the stimulus package[ii] to the storming of the Capitol by Donald Trump fanatics and associated turmoil has also had a hand in the weakening of the USD against the XOF.

As expected of exotic pairs, the value of the XOF/ USD pair has closely dovetailed in tandem with global, regional and domestic news. Nevertheless, as easily permutable the pair may seem, traders must allow for their investments to read beyond hyper-present ‘breaking news’ features.

The bearing of political circumstances in both, the US and in countries using the West African CFA franc have proven to have material consequences on the value of the pairing. Some noteworthy events that will be explored include:

  • Political unrest in Senegal
  • Impediments to the Nigerien democracy
  • Growing French military involvement in the Sahel region amidst an increasingly anti-French climate.

ELECTION-CENTRIC SKIRMISHES

Popularly hailed by Western media as West Africa’s “bastion for stability”, Senegal’s adversity on the domestic political front is giving cause for the erasure of the epithet. Senegal has been ranked 10th in Africa and 86th in the world on the Economist Intelligence Unit’s (EIU) Democracy Index in 2020; its points on the index have fallen by 0.14 to 5.67 since 2019[i].

Recent protests have broken out in the country, as electorate sentiments had been inflamed by the charging and arrest of the vociferous and well-supported opposition leader, Ousmane Sonko, with rape.

Corresponding to the start of the protests on March 3 and Sonko’s arrest the next day, a 0.37 pip fall in the pair was observed. The fall in the pair’s value on March 3 was relatively small compared to the next five days, due to lagged effects of the news transpiring through the market. As the pair floats at such a low value, substantial gains are difficult to attain, so movements and spreads are not considered to be substantial news. Hence, the 2.01% decline in the pair from the commencement of protests on March 3, to the announcement of his release on March 8[ii]is a substantial fall compared to the pair’s value on March 2.

On the contrary, Niger fared with a score of 3.29, and has been allocated the 125th spot on the global democratic institutions’ rankings, as per the 2020 EIU Democracy Index. Associated with this are current strains on democratic institutions through the 2020-21 Nigerien elections.

The unleashing of fraud allegations and ensuing protests from supporters of ex-president, Mahamane Ousmane, have yielded harsh, suppressive responses from authorities such as tear gas assaults on protestors[iii], internet restrictions and charging “a former president with attempting to overthrow the government”, following the February 21 disputed election[iv]. On February 26, the pair saw a 0.17 pip (0.94%) fall from the previous trading day, which could thus be ascribed to the victory of Mohamed Bazoum in the Nigerien presidential elections.

Nevertheless, like skirmishes, these election-centric power struggles are likely to remain short-term. However, with uncertainty on the horizon in terms of who will be at the helm of leadership, and hence, the precarity of fiscal and monetary policymaking and thus, the management of the nations’ general economic health, markets may see some polarising opinions on the value of the West African CFA franc.

Being ‘thinly traded’ however, means that exotic pairs are less liquid. This may mean that trading cannot be carried out on an arbitrary basis. Nevertheless, traders can avail of the ‘technical obedience’ of the XOF/USD pair, allowing for trading alongside support or resistance levels beyond breakouts. This is because of the way in which news headlines act as a potent – and sometimes the only – force moving the market for exotic pairs. In comparison with major pairs, technical obedience is not typically present due to the plethora of other market forces that govern such markets.

CONFLICT & INTERVENTION

The depth of French entrenchment in West African countries’ affairs has been matched with an equal entrenchment of these countries, in disentangling the former coloniser nation from current regional affairs.

The Senegalese opposition leader had characterised the current president, Macky Sall, as a “puppet” that “serves French interests, not Senegalese ones”[v]. Despite Sonko’s rejection against rape accusations, general sentiments on the course of the currency pair may be negative in the future, especially due to the somewhat seditious nature of the Senegalese opposition’s campaign. The telling signs of this include the targeting of French supermarkets, petrol stations and mobile phone booths following the violent escalation of the initially peaceful protests against draconian coronavirus restrictions, unbridled inequality, state corruption. Many characterise this escalation of conflict as arising due to Sonko’s anti-French rhetoric.

French involvement in enduring problems such as the destabilisation of security in the Sahel region are also seen. President Macron’s announcement[vi] ruling out the withdrawal of French troops in counteracting rampant terrorist insurgency in West Africa is an exhibit of French encroachment on African affairs. Tensions on this front are likely to surge, given the actions of countries like Mali and Burkina Faso, in opening negotiations and dialogue with radical organisations[vii], despite French opposition towards “enemies” and firm commitment to not “negotiate with terrorists”[viii].


Image: Topographical representation of threatened Sahel region areas and the Operation Barkhane French intervention

The collective movement towards extrication from French superintendence puts a spotlight on these nations’ strive for self-sufficiency. This long-term development has several implications on the pair’s future valuation. Growth and decline in the pair’s value can be expected as a result; self-sufficiency can equate to greater domestic investment and possibly greater FDI, wherein ramping up of XOF purchases can lead to a rise in its value. Alternatively, in the vein of repudiating neo-colonialism, the drive for self-sufficiency can adopt a nationalistic fervour which can halt FDI and growth-related benefits of globalisation and foreign collaboration. The resultant curtailment of the overall rate of development may thus cause the valuation of XOF/USD to take a protean turn.

TECHNICAL ANALYSIS

It is actually not a sensible idea to analyse XOF/USD with respect to technical analysis mainly because the pairing’s value is predominantly driven by media releases and the political agenda. The chart for the past 9-10 months shows that the currency pairing rose in value by 17.2 pips between the months of May and August 2020. This actually represented a 10.5% increase in the value of Western African CFA Francs which is a fairly substantial appreciation in its value. The fact that a movement of 17.7 pips represents such a large percentage movement in the currency goes to show the relative weakness of XOF. The rise in XOF/USD can be attributed towards a depreciation in value of USD because of civil unrest courtesy of the BLM movement and protests over the death of George Floyd and also the worsening in the handling of Covid-19 pandemic. The currency pairing then began to range between 0.001770 and 0.001815 from August to November. The sole piece of technical analysis which can be extrapolated is that XOF/USD re-tested the support level twice at points 1 & 2 and after failing to break this level, the momentum of the pairing went towards the upside. XOF/USD’s rise to 0.001877 (the pairings all-time high) was as a direct result again the uncertainty surrounding the US General Election. However, since the turn of the year, the pairing has been on a downwards trend with the currency falling 7.4 pips or 3.9%. And this is predominately due to events happening in the 7 countries which use the Western African CFA Franc. Such events include the death of Ivory Coast’s Prime Minister, Hamed Bakayoko, rising anti-French sentiment causing violent protests in Senegal and multiple Jihadist attacks in Burkina Faso. Some of these events can be directly attributed to fall in the value of XOF, for instance, a Jihadist attack near Burkina Faso’s northern border with Niger which killed 8 people on February 17th caused a 1 pip or 0.53% fall in value. This goes to show that although occurrences in the US usually dictates this pairing’s value, the recent political unrest and acts of terrorism have been digested within the FX market and caused notable impacts to transpire. Finally, looking at a couple of oscillators reading for XOF/USD, the RSI is at ~41.0 and the stochastic RSI is at 75.9 meaning both are currently within the acceptable ranges. However, it may be good to note that the stochastic RSI is getting towards the 80 level, indicating XOF/USD would be bordering at being overbought and hence, a trend reversal or a pullback in price could be on the horizon. Of course, this is not guaranteed but erring on the side of caution and being aware of such market pattern is always useful.

FUTURE OUTLOOK

All in all, the direction of the pair must be closely followed, due to the mercuriality of the occurrence of significant phenomena directly relevant to the pair’s valuation. This situation is further complicated due to investors having to track the events of all eight XOF countries which are directly implicated in market movements. Presently, the pandemic has “limited inflows of hard currency” while exacerbating problems of “the collapse of oil prices, lower trade and the flight of investors to safe havens”, contributing to the higher average XOF value. However, given the French Treasury’s guarantee to peg the XOF against the Euro and its resolve to not devalue the currency, devaluation-associated declines in the XOF value can remain a distant worry for traders.

The influence of the long-term unfolding of events are obscured at present and complex to interpret with limited information at hand. Such significant events to monitor include the adoption of the new ECO currency, security threats in West Africa (particularly in the Sahel region), upcoming elections and the outcome of current political unrest. Additionally, the gradual disengagement of France as the colonial puppeteer through the adoption of this new currency as well as through West African nations’ independent management of the region’s security crises is a prominent development that must be supervised by investors.

The creation of ECO can have positive implication on West Africa’s growing drive for pan-African self-sufficiency, regional and domestic growth. Benefits of “low transaction costs and making payments easier across the 15 ECOWAS member countries”[i] may bolster cross-country investments and development – such stability can reverberate to forex markets, thus appreciating the XOF against USD. Nevertheless, the pandemic has effectively rendered the adoption of the ECO as a pipe dream[ii]. Short-term priorities for West African governments will thus remain on reducing budget deficits and grappling with economic weaknesses, relying on the CFA and euro peg for.

It is established that news opinions are highly controversial and have greater impact and uncertainty in the short and long run. Nevertheless, a key point to remember is that the XOF is able to dictate its movement against the USD as West African events have greater importance to the pair than events occurring in the US. This may be due to the sparse volume of news available to the market, compared to US media which is replete with relevant American press releases. Thus, the amalgamation of news from XOF countries will have a greater impact on the pair than US news releases and hence, such headlines need to be followed and judged carefully.

Jargon Buster:

Neo-colonialism: Neocolonialism is the practice of using economics, globalisation, cultural imperialism and conditional aid to influence a country instead of the previous colonial methods of direct military control or indirect political control.

Technical Obedience: This is the idea that a breakout from support or resistance is showing a clear swing in market momentum and that prevailing levels of support or resistance are accurate regions to place take profits. This is regularly not the case with the majors since they are usually affected by a number of other market forces which aren’t necessarily accounted for.

Trump Administration: Trump Administration refers to policies implemented under his regime which included greater sentiment towards protectionism, creating more ‘American’ jobs and improving diplomatic relations with Russia and North Korea. Other radical and controversial polices included his stance on the US-Mexico border & trade, capital punishment and withdrawing from the Nuclear deal with Iran.

References:

[i] https://www.statista.com/statistics/1093256/novel-coronavirus-2019ncov-deaths-worldwide-by-country/

[ii] https://edition.cnn.com/2020/12/27/politics/trump-relief-bill-christmas-eve/index.html

[iii] https://www.eiu.com/n/campaigns/democracy-index-2020/

[iv] https://www.theafricareport.com/70906/senegal-opposition-leader-ousmane-sonko-released-under-judicial-supervision/

[v] https://www.africanews.com/2021/02/23/niger-s-mohamed-bazoum-wins-presidential-election-round-2-ec/

[vi] https://www.ft.com/content/d7319cb8-48c3-4acf-bfcf-7aaae0e5f9fd

[vii] https://www.aljazeera.com/news/2021/3/12/senegal-anti-french-sentiments-on-the-rise-amid-ongoing-protests

[viii] https://www.aljazeera.com/news/2021/2/16/macron-rules-out-withdrawing-troops-from-sahel-region

[ix] https://www.middleeasteye.net/news/sahel-negotiate-armed-groups-french-opposition

[x] https://www.jeuneafrique.com/1076943/politique/exclusif-emmanuel-macron-entre-la-france-et-lafrique-ce-doit-etre-une-histoire-damour/

[xi] https://www.aljazeera.com/economy/2019/7/12/new-african-currency-will-the-eco-replace-the-cfa-franc

[xii] https://www.cnbc.com/2020/09/29/west-africas-new-currency-could-now-be-delayed-by-five-years.html


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