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Pound Slides as BOE Cuts Rate

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The pound fell the most in more than four weeks after the Bank of England cut interest rates for the first time since March 2009, part of a suite of stimulus measures to help boost the economy after the U.K.’s vote to leave the European Union in June.

Sterling dropped at least 1.4 percent against all of its 16 major peers after the nine-member Monetary Policy Committee voted unanimously to lower the benchmark rate by 25 basis points to a record-low 0.25 percent. Officials led by Governor Mark Carney increased the central bank’s asset-purchase target for the first time in four years, raising the target by 60 billion pounds ($79 billion) to 435 billion pounds. U.K. government bonds jumped, pushing the 10-year gilt yield to a record low.

The MPC also said it will buy as much as 10 billion pounds of corporate bonds in the next 18 months, though there was disagreement among the nine members about whether quantitative easing was warranted at this stage. Options trading showed the pound could fall further in coming months.

Brexit ‘Headwinds’

“The BOE clearly is willing to provide an array of stimulus policies because it thinks that the U.K. economy is going to face substantial headwinds from Brexit,” said Peter Frank, global head of Group-of-10 currency strategy at Banco Bilbao Vizcaya Argentaria SA in London. “I think the BOE and the government is keen to see a much weaker pound.”

The pound fell 1.5 percent to $1.3126 as of 4:02 p.m. London time, the steepest decline since July 5, a day before it touched a 31-year low of $1.2798. Sterling weakened 1.4 percent to 84.85 pence per euro.

The decision to cut borrowing costs was forecast by all but two of 52 economists surveyed by Bloomberg, with the majority predicting a 25 basis-point reduction. Before the announcement, swaps pricing showed a 100 percent chance of a cut.
Economists in a separate survey were less certain about the possibility of the BOE announcing further stimulus measures, with 23 of 44 analysts forecasting no change to the the central bank’s quantitative-easing plan.

‘Further Easing’

“We feel this is an appropriate first step and anticipate further easing from the MPC in the coming months as the growth outlook becomes clearer,” said David Zahn, London-based head of European fixed income at Franklin Templeton Investment Management Ltd. “This is good news as it is supportive of the bond market. However, in general this will be slightly bearish for the pound.”

The pound has declined almost 12 percent against the dollar since the nation opted for Brexit, weakening for a third consecutive month in July, as economic consequences of the decision began to surface.

Derivatives trading suggested the pound will weaken further. The premium for three-month options granting the right to sell the currency against the dollar relative to those for buying rose 16 basis points to 1.07 percentage points. That’s still lower than the level on the referendum day when it was 4.13 percentage points.

On a longer-term horizon however, that concern was less pronounced. The premium for 12-month options was little changed at 1.635 percentage points.

Benchmark 10-year gilt yields dropped 16 basis points, or 0.16 percentage point, to 0.64 percent, having earlier touched 0.634 percent. The 2 percent bond due in September 2025 rose 1.505, or 15.05 pounds per 1,000-pound face amount, to 111.985. The nation’s two-year gilt yield fell eight basis points to 0.12 percent, after reaching 0.07 percent, the lowest since July 1.

“So the BOE delivered a dovish surprise as regards QE measures,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “Only roughly half the market probably had expected an increase of QE, probably less the introduction of corporate bonds. The BOE wants to set a clear signal that it has switched into crisis mode.”

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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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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