- Forex Weekly Outlook October 24-28
The US dollar strengthened last week after the European Central Bank cleared speculation that the institution will commence tapering soon, boosting the attractiveness of the greenback that saw the currency reaching a 7-month high last week. Also, Other factors contributed to the dollar rally, for instance, the inflation rate rose 0.3 percent in September from 0.2 percent in August — the fastest pace in five months. While, on a yearly basis, inflation climbed 1.5 percent, a 0.5 percent short of Fed’s 2 percent target. It’s highest in two years.
Accordingly, some analysts have said this has bolstered the odds of the Fed’s raising rate this fourth quarter, while the odds are there. It is nibble to note the discrepancies in these data, for example, the housing starts fell (9%) for the second straight month in September, even with the surged in building permits (6.3%) received by builders. This signaled that the increase in costs is holding builders and other investors back, this is evident in the increase in unemployment benefits (260,000) for the week ended October 15 after spending several weeks near 43-year low.
Again, industrial output rose 0.1 percent in September, below 0.3 percent forecast — with capacity utilization increasing just 0.1 percent to 75.4 percent. All these pointed to Fed Chair Yellen Janet’s Boston speech that economic growth is now determined by global demand, hence, her reluctant to raise rates without evidence of sustainability, especially with Brexit fallout impacting overseas orders and rising oil prices increasing cost of living. While, the possibility the Fed might move is there, so is the likelihood of the Fed not moving this fourth quarter. This week, investors will look to validate released data with the third quarter GDP due this Friday, consumer confidence, core durable goods and pending home sales.
In Canada, the loonie plunged to a 7-month low against the US dollar on Friday, following a failed trade deal with the European Union and largely dovish monetary policy report. According to the Bank of Canada (BOC) growth in exports is expected to slow in the second half of the year through 2017 and 2018, while the economy continued to struggle with weak consumer spending (-0.1%) and low inflation rate (0.1%). As it is, Canada needs more than its oil and domestic consumption to grow its economy — considering the fact that the economy annual growth is gradually moderating to about 1.5 percent, below two percent.
But with about 500 million EU consumers and trade deal estimated at $70 billion per year shut to the embattled nation, the focus is now on China, India and Trans Pacific Partnership deals. This is one of the reasons the Bank of Canada Governor Stephen Poloz and his team are expected to ease further in order to facilitate exports and support spending.
In the Euro-Area, the European Central Bank (ECB) left its interest rate unchanged and maintain the same assets buying program, while suggesting that it is unlikely the bank stop its quantitative-easing program without gradually reducing its purchasing size. Which means, the current monetary easing program is likely to be extended beyond the scheduled end-date of March 2017. This, prompt investors to desert the Euro-single currency as they expect more from Mario Draghi led team, and subsequently plunged the 19-nation single currency to its lowest in 7 months against the US dollar. So, this week the Euro-single currency should extend its decline as uncertainties surrounding Brexit, Italy referendum and Greece crisis continued to weigh on the region’s growth prospect and business confidence amid weak exports. Also, this week, investors will look to assess President Mario Draghi speech due on Tuesday, alongside a series of manufacturing PMI from the region and German Ifo Business Climate report to determine the direction of ECB going forward.
Overall, the US dollar remains strong this week, and as the odds of the Fed raising rate increases I expect the demand for dollar to respond likewise. However, global financial markets remain resilient with increasing global risks and uncertainties as investors continued to seek less risky assets while monitoring monetary policies. This week, AUDUSD, NZDUSD and AUDNZD top my list.
Two weeks ago, this pair tops our list, but after hitting our first target at 0.75059 it rebounded, reaching as high as 0.7733 last week. This week, with the odds of the Fed’s raising rates jumping to 66 percent from 29 percent in the previous week, this pair is likely to continue its downward trend towards our 0.75059 support, especially knowing that the non-commercials net long positions held for the dollar is $19.3 billion. But if Australia’s third quarter inflation rate due on Wednesday is better than 0.5 percent predicted, this pair might retreated temporarily before it continues its bearish run. Hence, traders are advised to keep an eye on the change in Australia’s economic outlook this week.
This week, with the bearish engulfing pattern formed/completed on Thursday, and further validated by Friday’s bearish pin bar close, below 20-day MA. I am bearish on this pair with 0.7505 as the target as long as 0.7621 resistance holds.
Also, two weeks ago I mentioned this pair bearish potential, but it retreated 44 pips to our 0.6989 support (target). This week, I am bearish on this pair because, one, it is overpriced and high foreign exchange is hurting New Zealand consumer prices, two, the odds of the Fed raising will boost dollar attractiveness over Kiwi and increasing the chance of our 0.6989 target been attained this week.
This pair, closed as dark cloud cover pattern last week. Indicating a seemingly selling pressure of the haven asset. While caution is advised trading this pair, I am bearish on AUDNZD as long as the price remains below 1.0733 resistance with 1.0439 as the target. Partly because I doubt the possibility of the Australian economy meeting its inflation target in the third quarter with high foreign exchange. Nevertheless, caution is advised.
Last week, our EURNZD target hit at 1.5180, giving us 289 pips.
Also, USDCAD target hit at 1.3033 before rebounding to a 7-month high.
This pair dropped after the Canada-EU deal failed, reaching almost a month low against the Japanese Yen. This week, this pair has turned bearish as shown by the chart, and as long as the price remained 78.10 resistance I am bearish on this pair with 77.05 as the target.
Naira Plunges to Record Low of N422/US$1 at Official Market
The Nigerian Naira extended its decline to N422 to a United States Dollar at the official forex market, the investors and exporters forex window managed by the FMDQ Group.
Naira opened the day at N413.50 to a US Dollar before plunging to as low as N436 at the spot forex market and N446 at the forward market. The local currency eventually closed the day at N422.07 per US Dollar.
Investors at the window traded $141.94 million during the trading hours of Thursday.
The decline was after Vice President Osinbajo asked the Central Bank of Nigeria (CBN) to rethink its current forex policy and allow the Naira to reflect market conditions. This, the Vice President said will help close the current gap that exists between the official rate and black market rate.
Media outlets had interpreted the Vice President position as a call for further devaluation of the Nigerian Naira. However, in a statement signed by Laolu Akande, Senior Special Assistant to the President on Media & Publicity, Office of the Vice President, Akande explained that Osinbajo is simply calling for a single forex rate to dislodge the activities of speculators and hoarders at the various unregulated black market.
He added that the 40 percent or N160 arbitrage difference between the official rate of N410 and N570 offered at the black market will continue to encourage corruption in the forex market.
“For context, the Vice President’s point was that currently the Naira exchange rate benefits only those who are able to obtain the dollar at N410, some of who simply turn round and sell to the parallel market at N570. It is stopping this huge arbitrage of over N160 per dollar that the Vice President was talking about. Such a massive difference discourages doing proper business, when selling the dollar can bring in 40% profit!
“This was why the Vice President called for measures that would increase the supply of foreign exchange in the market rather than simply managing demand, which opens up irresistible opportunities for arbitrage and corruption.”
At the black market, traders exchanged Naira at N565 to a United States Dollar on Thursday.
Osinbajo Explains Why Forex Policy Should Discourage Arbitrage and Corruption
Following Vice President Yemi Osinbajo suggestions that the Central Bank of Nigeria (CBN) should rethink its present forex policy that encourages arbitrage and corruption and allow the Nigerian Naira to reflect market realities that were misconstrued as devaluation by the media, the Vice President has now come out to clear the air that he is not calling for a devaluation of the embattled Naira but to close the arbitrage gap of 40 percent gain that existed between CBN rate of N410/US$1 and the black market rate of N570.
In a statement released by Laolu Akande, Senior Special Assistant to the President on Media & Publicity, Office of the Vice President, the Vice President position was that the current Naira exchange rate benefits only those who are able to access the US Dollar at N410, “some of who simply turn round and sell to the parallel market at N570. It is stopping this huge arbitrage of over N160 per dollar that the Vice President was talking about. Such a massive difference discourages doing proper business, when selling the dollar can bring in 40% profit!,” the statement reads.
It continues “This was why the Vice President called for measures that would increase the supply of foreign exchange in the market rather than simply managing demand, which opens up irresistible opportunities for arbitrage and corruption.
“It is a well known fact that foreign investors and exporters have been complaining that they could not bring foreign exchange in at N410 and then have to purchase foreign exchange in the parallel market at N570 to meet their various needs on account of unavailability of foreign exchange. Only a more market reflective exchange rate would ameliorate this. With an increase in the supply of dollars the rates will drop and the value of the Naira will improve.
“The real issue confronting the economy on this matter is how to improve the supply of foreign exchange, but this will not happen if we do not allow mechanisms like the Importers and Exporters window to work. If we allow this market mechanism to work as intended, we will find that the Naira will appreciate against the dollar as we restore confidence in the system.”
Dollar Rate to Naira Today at Official Forex Window
The Dollar rate to Naira closed 0.10 percent lower on Wednesday at the official forex window despite supply rising by over 100 percent.
Naira dipped at the official forex exchange window to N414.73 against the United States Dollar on Wednesday, down from N414.30 it closed on Tuesday.
The Dollar rate to Naira opened the day at N414.33 before dropping to as low as N415.20 during the trading hours of Wednesday. Investors traded $266.32 million on Wednesday, against $122.15 million exchanged on Tuesday.
At the unregulated forex section, the black market, the Naira was exchanged at N565.00 and N568.00 to a US$ on Wednesday in Abuja.
In Uyo, forex dealers said the Naira exchanged at N580 to a U.S dollar N580.00 due to increase in demand they experienced on Wednesday.
“We bought at N570.00 and sold at N572.00 per $1 on Tuesday, but today, we sold at N578.00 and even N580.00 at some point because the demand was much and people were selling as they see deemed fit, ” the anonymous dealer stated.
However, the Central Bank of Nigeria’s exchange rates remained largely unchanged as shown below.
Central Bank of Nigeria’s Exchange Rates
|10/6/2021||SOUTH AFRICAN RAND||27.0668||27.0998||27.1328|
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