- Forex Weekly Outlook October 31-November 4
The US economy recorded its fastest growth rate in two years in the third quarter, expanding at a 2.9 percent annualized rate. While, this is more than the 1.4 percent recorded in the second quarter and surpassed analysts’ 2.5 percent forecast, the dollar declined against most of its counterparts on Friday, after the Federal Bureau of Investigation (FBI) said it would investigate Hillary Clinton’s use of a personal email server while secretary of state. This report, shocked the markets that was already pricing in the likelihood of a Clinton president over Donald Trump and subsequently plunged the US stocks and currency, as investors scramble to assess the news that could be an advantage to Republican candidate Donald Trump.
Nevertheless, the new home sales (593,000) came out below economists’ forecast of 601,000 in September, but better than 575,000 recorded in August, while consumer sentiment drop to 98.6 in October, from 103.5 in September. On a critical look into the GDP report, consumer spending (2.1 percent) that has aided the economy, thus far was weaker than predicted in the third quarter, creating a mixed picture of the economy, but the increase in inventory rebuilding and soybean-related exports boosted the rebound recorded in the quarter. Although, the data is in line with Federal Reserve’s slow and steady progress, it is uncertain if the mixed outlook and strong underlying fundamentals are enough to raise rates this December.
However, the US dollar is expected to continue its gains once investors digested the FBI announcement and realized it’s unlikely to impact the election as it is. The table below shows U.S key macro data due this week.
|US Economic Release Forecast Previous|
|Average Hourly Earnings m/m 0.3% 0.2%|
|Non-Farm Employment Change 175K 156K|
|Unemployment Rate 4.9% 5.0%|
|Trade Balance -39.2B -40.7B|
|Federal Funds Rate 0.5% 0.5%|
|ISM Non-Manufacturing PMI 56.2 57.1|
In the UK, the economy surprisingly expanded 0.5 percent in the third quarter, beating 0.3 percent predicted by analysts even after the country’s decision to leave the European Union in June. The economy continued to grow with a better than expected performance from the services sector, growing at 0.8 percent rate, the fastest since 2009.
While construction fell 1.4 percent and manufacturing declined 1 percent with production dropping 0.4 percent in the third quarter, the economy’s resilience, due to strong consumer spending and services sector means it is unlikely the Bank of England will ease below current 0.25 percent interest rate this year — this is because the inflation rate is rising at a much faster pace and it will continue with the pound lower exchange rate and increasing cost of imported goods. This week, manufacturing, services and construction PMI report will help assess economic improvement prior to the monetary policy committee decision due on Thursday.
In Australia, inflation rate unexpectedly rose 0.7 percent in the third quarter, reducing the possibility of the RBA cutting rate in November. Even though, the RBA new governor Philip Lowe said the various factors suppressing inflation are expected to continue for a while, markets believe with the yearly inflation at 1.3 percent and an unemployment rate at 5.6 percent that it is unlikely the apex bank will loosen monetary policy this year, especially with high asset prices, particularly housing in Sydney and Melbourne, further easing could fuel borrowing among already heavily indebted Australian households. This week, the RBA is expected to maintain current 1.5 percent cash rate at its next meeting on Tuesday, while building approvals report is expected to dip further to -2.8 percent from previously declining -1.8 percent. Retail sales and trade balance will throw more lights to consumer spending and improvement in the manufacturing sector going forward.
Crude Oil, The Organization of the Petroleum Exporting Countries (OPEC) is yet to finalize production cap, as Iraq is seeking a similar exemption to what Nigeria and Libya are likely to get when the organization meet again on November 20. While, Iran has disagreed with the OPEC’s methodology insisting the nation need to reach pre-sanction level of 4 million barrels a day, an increase of about 400,000 barrels a day from current levels — a situation that is threatening the viability of the Algiers accord.
According, non-OPEC producers are yet to join OPEC on production cap, suggesting they wanted the OPEC to solve its differences before making known their commitment to managing the global oil glut.
Brent crude dropped 0.6 percent on Friday to trade at $49.42 a barrel.
Overall, high volatility is expected in the month of November, considering the US presidential election is due on November 8 — with fresh huddles for the Democratic presidential candidate Hilary Clinton to negate going forward. This week, investors will seek to digest a series of macro data and monetary policy decision due across key G7 nations. Also, commodities dependent currencies are likely to experience more volatility as OPEC seek to reach a consensus amid disagreement among its members. However, this week, my last week pick top my list, while monitoring series of events that will be unfolding across the financial market.
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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