The impact of trade wars on African FX volatility

The recent US tariffs have renewed US–China trade tensions, sending significant ripple effects through sub-Saharan African (SSA) economies, even though the region is not a direct participant in these conflicts. What US President Donald Trump termed ‘Liberation Day’ tariffs on 2 April 2025 quickly became ‘Incertitude Day’ tariffs for SSA economies – and SSA currencies in particular.

The trade war impact has brought significant currency depreciation in several markets on the back of commodity price volatility. Many SSA economies are heavily reliant on export of commodities, including the likes of copper, platinum, gold, cobalt, cashew and cocoa. As commodity prices fall, export revenues decline, leading to widening current account deficits, reduced foreign exchange reserves and, invariably, downward pressure on local currencies.

Added into the mix is capital flight and investor uncertainty, as some SSA countries were hit with high tariffs. These included Lesotho (50%), South Africa (30%) and Mauritius (40%), just to name a few.

Trade tensions have also increased global risk aversion. Investors are pulling capital from emerging markets in favour of safe-haven assets. In SSA, we have seen significant outflows from local bond and equity markets, as well as increased demand for the US dollar and other hard currencies. The hardest hit markets in terms of the depreciation of their local currencies include South Africa (rand), Zambia (kwacha) and Nigeria (naira).

The effects are being felt in almost all markets and by all businesses, including those that do not export directly to the United States. Several African countries, notably those that were excluded from the African Growth and Opportunity Act (AGOA) programme, have limited direct export relationships with the US. But we live in a global village, and if I’m exporting to China, for example, there’s a good chance that my goods are being beneficiated in China and then exported again. This is true for many East African and West African countries whose commodities – including cashews, cocoa, coffee, cotton, tea and copper – are mostly exported to Europe or Asia. In many cases, the refined products are ultimately sold into the US.

This affects supply chains in those African countries. As hard currency flows reduce, the reserves shrink, leading to domestic currency depreciation and further cutting of capital flows as investors start to sell local assets (for example equity and bonds). That, combined with the increased demand for hard currency US dollars, puts pressure on those local SSA currencies.

What can one do in these situations? There are two strategic responses. First, the need for currency hedging cannot be overemphasised. As Absa, we continue to assist our clients with foreign exchange (forex, or FX) hedging solutions that provide certainty in terms of cash flows through FX forwards and FX forward variant solutions so as to minimise FX volatility on the balance sheet. One doesn’t have to hedge all anticipated cash flows, but rather a portion (say, 50%) that helps to protect margins and limit vulnerability.

As much as we are in the midst of what might prove to be a prolonged trade war, there is still demand for commodities and goods and services. As a corporate treasurer, you will want to defend margins on your goods sold or bought, whether that’s monthly or quarterly. If you can put some form of FX hedge on those, it will help to protect those margins on your exports or imports.

Secondly, several African economies have responded to the US’s protectionism with a strategic realignment towards China. China, in turn, continues to deepen its trade ties with our continent, removing tariffs on exports from 33 African countries. While this offers some relief, it also increases SSA’s collective exposure to Chinese economic fluctuations.

In that context, the African Continental Free Trade Area offers an important response to global uncertainties. The AfCFTA, including its initiatives, like the Pan African Payment and Settlement System (PAPSS), could provide a crucial barrier to these ongoing global shocks by increasing Africa’s intra-regional trade beyond its current level of 14%, thereby reducing the region’s heavy reliance on offshore trade partners.

We live in a global economy, and no matter who we choose as our trade partners, we will always feel the effects of tensions between East and West. But Africa need not be caught in the middle. On the one hand, these trade wars present a crisis; on the other hand, they could be just the catalyst we need to accelerate the effective implementation of the AfCFTA.