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Credit Suisse Turns Bearish on U.S. Dollar Amid Fears of Monetary Policy Impotence

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A Credit Suisse branch in Geneva

Credit Suisse has turned bearish on the U.S. dollar versus the other two G3 currencies for the first time since the greenback’s scintillating rally began in the middle of 2014.

The bank’s currency team, led by Global Head of FX Strategy Shahab Jalinoos, sees EURUSD rising to 1.17 and USDJPY falling to 110 over the next three months.

Concerns about monetary policy impotence—that central bankers will be unable to successfully reflate their economies—are becoming embedded in currency valuations, according to the analysts.

There’s “a growing fear that monetary policy is now ‘pushing on a string,’ at least from an FX perspective,” they wrote. “EUR and JPY are materially stronger now than levels before ECB chief Draghi hinted at more easing and the BoJ introduction of negative rates in January.”

Options traders doubt that the Bank of Japan in particular will be able to keep the yen on its back foot going forward—a development that would bode ill for its attempts to win a decades-long battle against deflation.

“Risk reversal skews are now generally bid for JPY again in the same manner as they were prior to the start of QQE in 2012–the risk of large JPY sell-offs linked to BoJ policy is gradually being priced out,” wrote Jalinoos & Co.

Meanwhile, in part due to fears that monetary stimulus from the ECB and BoJ will fail to bear fruit, investors are skeptical of the Fed’s ability to continue decoupling policy from that of other major central banks.

The much-ballyhooed divergence trade—which analysts at Credit Suisse were quite bullish on in November—is over, according to Jalinoos’ team, which highlighted “an obvious end to the monetary policy divergence trade when looking at rate differentials.”

“It goes without saying that the market is no longer expecting more Fed rate hikes in 2016,” the strategists concede.

The bulk of the initial move in USDJPY that started near the end of 2012 was predicated on presumed monetary divergence, with Prime Minister Shinzo Abe pledging easing on this front, while Ben Bernanke would soon set off the “taper tantrum” in May 2013.

A situation in which the Bank of Japan’s stimulus has run its course—at least on the currency—and expectations for negative rates in the United States continue to mount would send ripples through the entire foreign exchange complex and potentially other asset classes, to boot.

“A violent and persistent turnaround in U.S. rate expectations would certainly classify as the type of scenario that would upset the apple cart for most USD versus G10 forecasts, but especially for USDJPY,” the strategists wrote. “The market is not well positioned psychologically for this outcome.”

As the yen is typically viewed as a risk-off or safe haven currency—and because the USDJPY pair has tracked the S&P 500 fairly closely since Abe’s rise in the polls began—equities could also be adversely affected by a period of relative strength in the Japanese currency.

Bloomberg

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Forex

Nigeria’s Diaspora Remittances Decline by 28 Percent to $16.8 Billion in 2020

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US dollar - Investors King

Nigeria’s diaspora remittances declined by 27.7 percent or $4.65 billion from $21.45 billion in 2019 to $16.8 billion in 2020, according to the World Bank Migration and Development report.

A critical look into the report shows remittances to sub-Saharan Africa declined by 12.5 percent in 2020 to $42 billion. This was largely due to the 27.7 percent recorded by Africa’s largest economy, Nigeria, which accounted for over 40 percent of the total remittance inflows into the region.

The report noted that once Nigeria’s remittance inflows into the region are excluded, remittances grew by 2.3 percent in 2020 with Zambia recording 37 per cent.

Followed by 16 percent from Mozambique, 9 percent from Kenya and 5 percent from Ghana.

The decline was a result of the global lockdown that dragged on the livelihood of most diaspora and unclear economic policies.

In an effort to change the tide, the Central Bank of Nigeria (CBN) introduced a Naira 4 Dollar Scheme to reverse the downward trend and boost diaspora inflows into the economy.

However, the reports revealed that other external factors like insecurities, global slow down, weak macroeconomic fundamentals, etc continue to discourage capital inflows.

On Tuesday, the CBN, in a new directive, announced it has halved dollar cash deposit from $10,000 to $5000 per month.

The move is geared towards discouraging overreliance on the United States Dollar and encourage local patronage and production.

Mr. Guy Czartoryski, Head of Research at Coronation Asset Management, had said in the report, “We looked at the top 10 banks and the breakdown of their deposits showed that 40 per cent of their deposits are in dollars and it is quite astonishing.”

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Forex

Deposit Money Banks Reduce Dollar-Cash Deposits by 50 Percent to $5000/Month

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United States Dollar - Investors King Ltd

Nigeria’s Deposit Money Banks (DMBs) have reduced the amount of United States Dollars that customers can deposit into their domiciliary accounts by 50 percent from $10,000 to $5,000 per month.

A bank official who preferred not to be mentioned confirmed the new policy to Investors King.

He, however, stated that the new policy does not apply to customers making electronic transfers as well as oil and gas companies and dollar payments into government accounts.

Checks revealed that the Central Bank of Nigeria (CBN) introduced the new policy to discourage the strong appetite for the United States Dollar, which has continued to rise.

A recent report has shown that despite persistent dollar scarcity, around 40 percent of bank deposits in the nation’s top ten banks were in dollars.

Mr. Guy Czartoryski, Head of Research at Coronation Asset Management, had said in the report, “We looked at the top 10 banks and the breakdown of their deposits showed that 40 per cent of their deposits are in dollars and it is quite astonishing.”

According to an analyst at ARM Securities Limited, Mr. Olamofe Olayemi, “this has to do with how much confidence the people have in the naira. Over time, we have seen significant depreciation in the naira.

“If you look at what happened in 2020, no one expected that the naira would be devalued twice in that year and even the outlook, this year is suggesting further depreciation in the naira.

“So, it makes sense to a lot of people to store their money in dollars. But, from the CBN standpoint, you agree with me that there is dollar scarcity.”

He, therefore, argued that the new policy might discourage financial inclusion and encourage cash outside the banking system.

Again, it is important for the flow of money to be captured in the system,” he said.

The CBN had extended its Naira 4 Dollar Scheme last week to further encourage dollar inflow into the Nigerian economy.

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Naira

Naira Closed at N411.25 to US Dollar at NAFEX Window

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Naira Dollar Exchange Rate - Investors King

The Nigerian Naira declined further against the U.S Dollar on Tuesday ahead of the Ramadan holiday to trade at N411.25 to a single U.S Dollar at the Nigerian Autonomous Foreign Exchange (NAFEX) window.

The local currency plunged as low as N420.23 per dollar during the trading hours of Tuesday despite opening the day at N410.33/US$ before settling at N411.25 to a US dollar.

Investors on the window exchanged $98.33 million on Tuesday.

At the parallel section of the foreign exchange, Naira traded at N483 to a United States Dollar; N673 to a British Pound and N580 to a Euro.

Foreign exchange rates remained largely unchanged at the bureau de change section, with the Naira trading at N482 to a U.S Dollar; N674 to a British Pound and N584 to a Euro.

Several factors continue to weigh on the Nigerian Naira, especially with the foreign reserves hovering around record low and crude oil output not at an optimal level.

Other factors like rising inflation rate and drop in economic activity due to COVID-19 effect on the economy and lack of enough fiscal buffer to cushion the economy.

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