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This currency is tanking—and the worst may be ahead

Why the Kenyan currency is tanking
Why the Kenyan currency is tanking

The Kenyan shilling is sliding amid serious inflation in the Kenyan economy, one of the largest in Africa.

In April, year-over-year inflation rose to 7.1 percent, due to drought and rising oil prices. As Erin Gibbs, equity chief investment officer at S&P Capital IQ, pointed out: "That actually meant that inflation was outpacing their growth. And because Kenya is really exposed to short-term debt for their current account deficit, they are very exposed [to] inflation."

The inflationary pressures have weighed on Kenya's currency, leading it to drop by 4 percent against the U.S. dollar over the past month.

"The Kenyan shilling (KES) is deteriorating rapidly," Neil Azous, principal at Rareview Macro, wrote in a note to clients Tuesday. "USD/KES is an example of what a breakout on a chart truly looks like."

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Further inflationary pressures may have been fostered by the country's economic decisions. In the beginning of May, Kenya raised its minimum wage by 12 percent. That means unskilled farm workers now make a minimum of 5,436 Kenyan shillings per month—which translates to $55.43, or all of 32 cents per hour, assuming a 40-hour work week.

"Right when they announced the higher inflation, their president also announced a minimum wage increase, which certainly didn't help the inflation news. And that's really where we saw that spike in their currency," Gibbs said.

Kenyan shilllings
Trevor Snapp | Bloomberg | Getty Images

Kenya, the world's biggest black tea producer, is not alone in seeing its currency weaken. Neighboring Tanzania has seen its shilling drop 20 percent against the U.S. dollar this year, and the Mozambican metical is down more than 10 percent.

"All of these currencies have been weakening," noted Win Thin, global head of emerging market currency strategy with Brown Brothers Harriman.

For several years, "everything was going right for frontier currencies," Thin said, referring to the currencies of economies considered less developed than emerging markets. But with the U.S. dollar strengthening, commodities plunging and the Federal Reserve set to raise the key federal funds rate, "you're seeing a total reversal of all the good times, and these countries are very vulnerable."

"There are a lot of dangers out there, especially because a lot of these markets just aren't liquid. In the months ahead, I think a lot of currencies and countries are going to get really clobbered," he told CNBC.

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