The pressure on the cedi’s value has eased due to an increase in foreign exchange (FX) liquidity, especially in US dollars.
This improvement follows the Bank of Ghana’s significant intervention in the market last week. The Central Bank injected about $59 million into the spot market and auctioned $20 million to Bulk Oil Distribution Companies.
This action by the Bank of Ghana (BoG) is the largest support provided in a single week since the start of 2024. The added FX liquidity helped stabilize the cedi, maintaining its value for most of the week.
However, by Friday, May 17, 2024, the cedi experienced a setback as corporate demand for foreign currency surged, causing it to lose value again.
Consequently, the cedi depreciated at a much lower by 0.84% week-on-week against the American greenback and 1.22% week-on-week vs the pound.
Conversely, the Cedi gained 2.80% week-on-week against the euro.
The year-to-date loss of the cedi is however 18.70%. It is going for about GH¢15.20 to a dollar on the retail market.
Parliament of Ghana approved a $150 million World Bank’s International Development Association (IDA) loan last Friday, May 17, 2024, to finance the ongoing Greater Accra Resilient and Integration Development project.
Though the expected date of inflow is not stated, analysts believe access to this fund will be FX-supportive and provide some backing to the cedi.
This week, however, the local currency is expected to weaken slightly on stronger demand for the dollar.
Dollar Performance on Weak CPI Data
Moreover, the US dollar, as measured by the DXY index, fell nearly 0.8% last week. This decline was mainly due to a drop in US Treasury yields, which was triggered by weaker-than-expected consumer price index (CPI) data.
In April 2024, the headline CPI rose by 0.3% on a seasonally adjusted basis, missing the forecast of 0.4% and bringing the annual rate down to 3.4% from 3.5%.
The lower-than-expected CPI figures renewed optimism that the disinflationary trend, which began in late 2023 but stalled earlier this year, had resumed.
This led traders to speculate that the Federal Reserve might start easing policy restrictions in the fall. As a result, the dollar faced downward pressure, with sellers increasing their bearish position.
Furthermore, cautious comments from several Federal Reserve officials about the timing of rate cuts led to a modest rebound in the US dollar. However, this small recovery was not enough to offset most of the currency’s earlier losses.
Looking ahead, the possibility of the Fed easing policies in the second half of the year, along with growing signs of economic weakness, suggests that US bond yields will struggle to rise.
This removes a key factor that supported the dollar’s strength in the first quarter, indicating the potential for further declines in the near term.
The upcoming week has a relatively light US economic calendar, allowing recent foreign exchange movements to stabilize.
However, the near-term outlook will need to be reassessed later this month with the release of the next batch of core Personal Consumption Expenditures (PCE) figures.
As the Federal Reserve’s preferred measure of inflation, the PCE deflator will provide essential insights into the current inflation landscape, which is critical for guiding the central bank’s policy decisions and influencing broader market trends.
Despite recent support from the Bank of Ghana, the cedi remains under pressure due to high corporate demand for foreign currency. Future stability may hinge on upcoming PCE data in the US, which will influence Federal Reserve policies and broader market trends.
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