Bloomberg: Investors should borrow Kenya’s shilling to buy Zambia’s kwacha to take advantage of interest- rate differentials between the two African nations, according to Investec Asset Management.
Non-deliverable forward transactions enable investors to borrow Kenyan shillings at 2.36 percent for as long as a year, and invest the proceeds in Zambian kwacha at 4.31 percent, making it profitable to “short” the shilling for its southern African counterpart, according to Antoon de Klerk, a Cape Town- based analyst at Investec Asset Management. Surging prices for copper, which account for about 70 percent of Zambia’s export revenue, coupled with foreign investment in its mining industry, will also support the kwacha, he said.“Rates are so low in Kenya it makes the shilling a good funding currency for intra-African carry trades,” de Klerk said in an interview. “Copper prices are well-supported so that’s positive for the kwacha.”
A forward is a contract to trade an asset, such as a currency, at a future date. In a non-deliverable forward contract, no principal is exchanged, or delivered, only the difference between an agreed price and the price at the time of the contract.Carry trades involve borrowing in countries with low interest rates to invest in markets that offer higher returns, a strategy that has helped South Africa’s rand and Brazil’s real surge to best performing emerging market currencies since the start of last year. Benchmark interest rates of 10.75 percent in Brazil and 6 percent in South Africa compare with deposit returns of 0.1 percent in Japan and 0.25 percent in the U.S.
Copper prices have trebled since the start of last year as demand from China, the world’s biggest user of the metal used in pipes and wiring, outpaced supply. Copper will lead a rally in base metals into 2011 as increased consumption cuts stockpiles and financial market turmoil spurs investment demand for commodities, according to Morgan Stanley.“Zambia’s copper production has increased by about 60 percent in the past year and there’s been consistent foreign direct investment into that sector,” said de Klerk.Kenya’s shilling is likely to depreciate about 2 percent to as weak as 82 per dollar over the next three months while Zambia’s kwacha will probably gain almost 4 percent to as strong as 4,500 over the period, de Klerk said. The shilling traded at 80.35 per dollar by 10:05 a.m. in Johannesburg while the kwacha was at 4,685 to the U.S. currency.