December is turning into a cruel month for traders counting on cuts in interest rates to drive down currencies.
New Zealand’s dollar jumped the most since November after central bank chief Graeme Wheeler delivered the policy easing that economists had predicted without the promise of further reductions. That came less just a week after his European counterpart, Mario Draghi, sparked the euro’s biggest rally since 2009 by unveiling a smaller-than-anticipated stimulus package.
The elephant in the room is the Federal Reserve. Its looming policy decision is making it trickier for speculators to predict the actions of other central banks and to work out where exchange rates are headed. As with the euro, strategists are now reassessing forecasts for the kiwi, becoming less certain how far it can extend this year’s 13 percent drop, which is already the steepest since 2008.
“Investors are clearly finding it harder to read central banks,” said Mansoor Mohi-uddin, senior markets strategist at Royal Bank of Scotland Group Plc in Singapore. “Central banks are all hoping the Fed’s imminent tightening will weaken their domestic currencies against the greenback, so they’re holding back on meeting the market’s expectations for further easing.”
The Parker Global Currency Manager Index of top funds has lost 0.7 percent this month to extend its slide in 2015 to 2.7 percent. That puts it on course for its worst annual decline since 2011.
For New Zealand dollar bears, Reserve Bank Governor Wheeler didn’t go far enough when he cut the official cash rate by a quarter-percentage point to 2.5 percent, completing the reversal of the four increases in 2014. They were left disappointed by his comments in Wellington on Thursday that the fourth cut this year should be enough to ensure inflation accelerates toward the central bank’s target. Lower interest rates tend to reduce demand for currencies.
Instead, traders will have to depend on the prospect of further U.S. rate increases, as well as the falling Chinese yuan and slumping commodity prices, to push the kiwi lower, RBS’s Mohi-uddin said.
The local dollar was at 67.53 U.S. cents as of 8:53 a.m. in London on Friday, having rallied from a six-year low of 61.30 on Aug. 24 and as low as 65.82 just after the RBNZ’s policy announcement. It gained as much as 1.7 percent by the New York close on Wednesday, the trading session that included the policy decision, the steepest intraday climb since Nov. 19.
“We still like the U.S. dollar higher heading into the Fed, and the current concerns about commodity prices and China support the case for New Zealand dollar weakness,” said Raiko Shareef, a markets strategist at Bank of New Zealand Ltd. in Wellington. “But there will be some offset by a relatively robust New Zealand economy and an on-hold RBNZ, which means that weakness may be more modest than we’d thought earlier.”
Currency bears were also caught out as the euro surged 3.1 percent on Dec. 3 after the European Central Bank’s quantitative-easing overhaul and deposit-rate cut fell short of what some investors had predicted. Draghi repeatedly hinted about more easing in the run-up to the gathering, prompting hedge funds and speculators to push bets on a weaker euro close to a record.
After two cuts this year, the Bank of Korea left its benchmark rate unchanged Thursday, saying it would wait to see how the Fed’s decision impacted its economy.
That may focus attention on whether other central banks will be influenced by the prospect of an imminent U.S. rate increase. Officials in Sweden, Hungary and the Czech Republic are all due to meet before the Fed decision next week. Norway’s central bank will decide on policy after its U.S. counterpart.
The full implications of this month’s decision in Wellington have yet to be digested. In the wake of the RBNZ meeting, Macquarie Bank Ltd. and Bank of New Zealand are both looking again at their forecasts for the kiwi to weaken to 61 U.S. cents in the first half of 2016. The median estimate in a Bloomberg economist survey is for a drop to 62 cents.
New Zealand’s dollar tumbled 18 percent against its U.S. counterpart in the first three quarters of this year, and since the end of September has rebounded almost 6 percent, outpacing all of its major peers. The resurgence has been helped by prices for dairy, the country’s biggest export, stabilizing after reaching a 12-year low in August.
Wheeler has now unwound all of the 1 percentage point of rate increases he carried out last year, taking borrowing costs back to the record low of 2.5 percent that he inherited when the New Zealand native took up his post in 2012 after spending more than a decade in Washington as a World Bank official.
“Strictly speaking, the explicit easing bias remains, but it is conditional and the RBNZ made it clear they think they have done enough,” said Gareth Berry, a foreign-exchange and rates strategist at Macquarie Bank in Singapore. “Apart from the usual sensitivity to dairy auctions, global influences will have a greater say.”
He has been relying on lower rates to make the nation’s exports more competitive, though he’s reluctant to ease further as Auckland’s property boom spreads and the economy shows signs of gaining momentum.
“It does seem that the central banks hope that the Fed will help them keep their currencies from rallying,” said Valentin Marinov, head of Group-of-10 currency research at Credit Agricole SA’s corporate and investment-banking unit in London. “They feel they need to preserve some of their ammunition for the future battles of the global currency war.
Naira Devaluation Pushed Exchange Rate to N500/US$ at Black Market
Naira to United States Dollar exchange rate plunged to N500 on Monday after the Central Bank of Nigeria (CBN) devalued the Naira by N6 on Friday amid growing scarcity.
At the current rate, the local currency has lost N140 per US dollar when compared with N360 it was sold in the same month of 2019 and N5 compared to N495 it exchanged on Friday.
In an effort to ease pressure on the nation’s foreign reserves and unify foreign exchange rates in line with the International Monetary Fund and the World Bank’s requirement for loans, the CBN devalued the official exchange rate by N6 from N379/US$ to N385/US$ and directed bureau de change operators to sell at N392/US$, up from N386/US$.
However, with importers and businesses looking to meet the usual high demand for goods in December pushing demand for the United States dollar off the roof, Naira’s value has continued to plummet despite efforts by the CBN to prop up its value.
Against the British Pound, the Naira declined to N650, down from N620 it exchanged last week. This depreciation continues against the Euro common currency as the local currency declined to N585.
Lack of liquidity due to the weak foreign reserves, low oil prices and weak demand for the commodity amid production cuts by OPEC and allies is hurting CBN’s ability to effectively intervene at the nation’s foreign exchange markets.
The apex bank usually sells forex to dealers to ease scarcity and facilitate trades. However, lack of foreign revenue generation has forced the CBN to reduce its weekly forex sales to $10,000 per bureau de change operator despite reopening of the economy pushing demand for forex further up.
Again CBN Devalues Naira by N6 Ahead of World Bank’s $1.5bn Loan Request
The Central Bank of Nigeria (CBN) has once again devalued the Nigerian Naira by N6 to the United States Dollar, making it the third time the apex bank will adjust the Naira exchange rate this year.
The devaluation brings the CBN closer to actualising foreign exchange unification demanded by the International Monetary Fund (IMF) in April before the $3.4 billion loan was approved.
This same condition was enforced by the World Bank as a prerequisite for approval of $1.5 billion loan request submitted by the Federal Government. The loan the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, said she was positive it would be approved by the multilateral institution in the next meeting given that the Federal Government has met all the conditions for the said loan.
24 hours later, the apex bank devalued the Naira official rate by N6 from N379/US$ to N385/US$. While the International Money Transfer Service Operators (IMTOs), all authorised dealers, bureau de change operators and service providers were asked to add N6 across all rates.
The rate for IMTOs against the US dollar has now moved from N382 to N388. Meaning banks will now sell dollar to the CBN at N389, up from the previous N383 to us dollar.
Again, the Central Bank sale of dollar to the bureau de change operators was pegged at N390 to dollar, against the old N384 to US dollar.
The apex bank, therefore, directed the BDCs to sell at not more than N392 per dollar to end-users. The old rate was N386 to a US dollar.
The CBN circlar reads in part, “Weekly Exchange Rate For Disbursement of Proceeds of International Money Transfer Service Operators’ pegged IMTOs sale of dollar to banks at N388 to dollar; banks sale of dollar to CBN at N389 to dollar and CBN sale of dollar to BDCs at N390 to dollar. The BDCs are now expected to sale to end-users at not more than N392 to dollar and each BDC is entitled to buy $10,000 weekly”.
More Problem for CBN as Naira Approaches N500/US$ at the Black Market
Naira plunged against the United States Dollar to a record low of N495 at the black market on Thursday despite the Central Bank of Nigeria saying it has enough financial means to meet forex demands.
The Naira declined by N12 from N483 it exchanged on Monday amid persistent scarcity and high demands by importers and businesses looking to offset COVID-19 losses with the usual December high demand sales.
Godwin Emefiele, the Governor of the Central Bank of Nigeria (CBN), on Tuesday blamed the wide foreign exchange rate at the black market on speculators and hoarders looking for personal gain at the expense of the nation.
He went on to caution experts using black market rates to analyse the local currency performance to stop and claimed that section of the forex only accounts for 5 percent of the nation’s total foreign exchange transactions.
While that might be true, it is also true that majority of manufacturers and businesses have turned to the black market for their forex needs in recent months, especially after it became obvious that the apex bank does not have enough liquidity to service the economy.
The nation’s foreign reserves has been battered by the weak oil prices and the continuous production cut by OPEC and allies to artificially support low prices. Nigeria’s foreign reserves is presently hovering between $35 billion and $36 billion after plunging from $45 billion attained in June 2019, according to the latest data from the Central Bank of Nigeria.
Against the British Pound, the Nigerian Naira depreciated by N15 to N635 from N620 it exchanged on Monday. Another indication of chronic forex scarcity as the local currency also plunged to N580 against the European common currency, the Euro.
The wide forex is expected to further weigh on the nation’s inflation rate and consumer spending this December.
On Tuesday, the apex bank left the interest rate unchanged at 11.5 percent and attributed the rising inflation rate to structural policies, the recent #EndSARS protest and a surging fuel price.
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