USD to GHS: Ghana cedi outlook ahead of BoG decision

The Ghanaian cedi continued its freefall this week as investors focused on actions of the Bank of Ghana (BoG) decision and the Federal Reserve. The USD/GHS exchange rate surged to a record high of 14.55, higher than its January open of 11.80. Cedi has plunged by almost 200% in the past five years, making it one of the worst-performing currencies globally.

Bank of Ghana’s decision

The currency crash has accelerated after Ghana became the first country to default on its debt obligations during the Covid-19 pandemic. Since then, the country has been working with the IMF to restrucure most of its debt. Just recently, the country signed a Memorandum of Understanding (MoU) to restructure debts worth $5.4 billion. 

The next important catalyst for the Ghanaian cedi is the Bank of Ghana interest rate decision scheduled for Monday. Most economists expect the bank to leave interest rates unchanged at 29% for the third straight meeting. Higher rates are needed to contain inflation, which has remained above 25% in the past few months.

The Ghanaian cedi has also plunged because of the weaker cocoa earnings even as the commodity has surged to a record high. Data shows that cocoa earnings plunged by almost 50% in the first four months of the year to almost $600 million. 

Therefore, it is unclear whether the Ghanaian cedi will recover when the IMF starts disbursing over $360 million in June. In the past, we have seen some currencies like the Pakistani rupee and the Kenyan shilling rebound when the IMF starts disbursements. 

USD/GHS chart

Hawkish Federal Reserve 

A key factor that could impact the Ghanaian cedi – and other emerging market currencies – is the Federal Reserve. Most analysts have started to change their tune on the Fed after the recent economic numbers revealed that inflation was getting higher than expected. 

In a statement last week, JPMorgan’s Jamie Dimon warned that the Fed could even hike rates if inflation remains steady. At the same time, analysts at Goldman Sachs said that the bank will start cutting rates in September while its CEO, David Solomon, said that he does not see the need for a cut this year.

Higher interest rates in the US is often a bad thing for emerging and developing market currencies because of their risks. Investors believe that investing in the US dollar assets in that period is a safer bet. 

Therefore, my estimate is that the USD/GHS exchange rate will retreat to the key support at 14.06 (November 2022 high) and then resume the bull run.