The Effect of East Africa Region Currencies Exchange Rate Fluctuations on the Performance of the Nairobi Securities Exchange

Abstract

Currently, because of increasing pace of international investment portfolio diversification, cross-border capital inflows, inter-market return links, the embrace of floating exchange rate regimes in developing countries, equities and foreign exchange markets have become closely inter-connected. This paradigm has increased the kind of investment possibilities as well as the change of exchange rates, investment risk decisions and diversification of portfolios for a high return. Consequently, getting an understanding of the connection between exchange rates and stock markets will facilitate local and world-wide investors creating strategies for diversifying and hedging their portfolios. This research sought to explore the consequence of exchange rate oscillations of East African region currencies on the performance of the Nairobi Securities Exchange. The variables under study included exchange rate fluctuations of KES/USHS, KES/TSHS and KES/RWF as independent variables, changes Nairobi All Share Index (NASI) as the dependent variable, changes in inflation and CBK rate as control variables. The research utilised descriptive research design and secondary data for a period covering eight years and 5 months. The data collected was analysed using the excel multiple regression model to arrive at the relationship equation of the variables. The findings revealed existence of a negative weak relationship between foreign exchange rate changes of KES/USHS and, KES/TSHS against the NASI while the KES/RWF had a positive relationship with changes in NASI. These findings supported the flow oriented model of exchange rate theories and consummated the objective of this study. This research revealed existence of a relationship between exchange rates fluctuations of East Africa region currencies and the Nairobi Securities All Share Index. This therefore means investors in the region must monitor these exchange rate changes to manage their investment risk and diversify their portfolios accordingly. These findings provide a source of reference that the East Africa Community Monetary Union secretariat should consider and examine this association between exchange rates and the equity market performance as they design and structure the EAC common monetary union. In addition these findings should be considered by the monetary policy regulators i.e. the central banks in managing the exchange rates through money supply between the regional currencies. Finally the findings revealed existence if a weak relationship between the variables and a significant portion of changes in the dependent variable (Change in NASI) being unexplained by independent the variables under study hence, need to carry out further research on other factors responsible for the changes in performance of the Nairobi Securities Exchange.