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CBN Black Market Attack is Just a Stopgap Until Nigeria Floats the Naira

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Forex Weekly Outlook November 7-11
  • CBN Black Market Attack is Just a Stopgap Until Nigeria Floats the Naira

Don’t be fooled by the biggest black-market gain in a year for Nigeria’s naira.

The rally, sparked by increased sales of foreign exchange forwards and looser capital controls, is contingent on the central bank continuing to sell down its reserves. And until it devalues or makes a clear switch to a free-floating currency, Africa’s most-populous country will struggle to lure back foreign investors, according to JPMorgan Chase & Co. and Renaissance Capital.

Forwards suggest more declines to come, investors are shunning naira assets, and a web of alternative exchange rates only adds to the confusion over the currency’s real value.

After sales of $600 million of one- and two-month forwards last week, the naira’s black market rate rose 13 per cent to 460 per dollar from an all-time low of 520. It appreciated another 2.2 per cent to 450 on Monday after the central bank sold $100 million of 60-day forwards. That narrowed the gap with the official rate, which the central bank has kept at around 315 since August, to the smallest since September.

The number of exchange rates in the country “further complicates” an already convoluted system, according to John Ashbourne of London-based Capital Economics.

Nigeria, which has always managed its currency tightly, charges people different prices for foreign exchange depending on their needs. Last week, Nigerians going on business trips abroad or paying overseas medical and school bills were lured away from the black market with a rate 20 per cent above the official interbank level, equating to about 370 per dollar.

Even after the rebound, the currency remains 32 per cent weaker on the black market than on the official one. Naira forward contracts maturing in three months trade at 357 per dollar, suggesting the currency will drop 12 per cent in the period. Naira six-month contracts are quoted at 385.

Nigeria’s Eurobond yields have dropped to the lowest since May 2015, showing that investors are keen to get more exposure to the nation amid higher oil prices and waning pipeline attacks by militants in the Niger River delta. It’s a different story for naira-denominated assets. Local-currency bonds average 16.4 percent, the second highest after Egypt among 31 major emerging markets tracked by Bloomberg.

It’s the same story with equities. Nigerian stocks, languishing near a 10-month low, are the cheapest in Africa, with a price-to-earnings ratio based on estimates for the next 12 months of 7.6, barely half the level of South Africa. Yet the market capitaliSation of the dollar-based Global X MSCI Nigeria Exchange Traded Fund, listed in New York, has more than doubled in the last year to $35 million. That suggests investors are keen on Nigerian stocks, just not in naira.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Oil Prices Rise in Asian Trade as Supply Concerns Heighten Amid Russian Attacks

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Oil

Oil prices surged on Monday during the Asian trading session as concerns over global supply intensified amidst ongoing attacks on Russian energy infrastructure.

Brent crude oil, against which Nigerian oil is priced, climbed by 47 cents to $85.81 a barrel while the U.S. West Texas Intermediate (WTI) crude rose by 49 cents to $81.53 a barrel.

The market’s bullish sentiment was largely influenced by recent attacks on Russian refineries, which added $2-$3 per barrel of risk premium to crude last week.

These attacks persisted over the weekend, further heightening concerns about supply disruptions.

One of the strikes ignited a brief fire at the Slavyansk refinery in Kasnodar on Saturday. This refinery processes approximately 8.5 million metric tons of crude oil annually, equating to 170,000 barrels per day.

Consequently, a Reuters analysis revealed that these attacks have idled around 7% of Russian refining capacity in the first quarter of the year.

The impacted refining complexes play a crucial role in processing and exporting crude varieties to various markets, including China and India.

The escalating tensions in the Middle East also contributed to market unease. Israeli Prime Minister Benjamin Netanyahu confirmed plans to push into Gaza’s Rafah enclave, disregarding pressure from Israel’s allies.

This move raised concerns about regional stability, amplifying geopolitical risks in the oil market.

Investors are closely monitoring the outcome of the U.S. Federal Reserve’s two-day meeting scheduled to conclude on Wednesday.

The Fed’s decision regarding interest rates could provide further clarity on market direction, potentially impacting oil prices in the near term.

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Commodities

Commodity Trading Industry Hits $100 Billion Profit, Second-Best Year on Record

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Zambian economy

The global commodities market has reported $100 billion in profits despite facing challenges and disruptions, making its second-best year ever. 

According to analysis from consultancy firm Oliver Wyman LLC, while earnings have dipped slightly from the record-breaking levels of 2022, this year’s profits easily surpass previous highlights, including those seen during the global financial crisis of 2008-2009.

Consultant Adam Perkins attributes this success to favorable margins driven by ongoing supply-demand dynamics, despite the volatility seen in various sectors.

While specific financial results for many players within the industry are yet to be made public, the report indicates that major independent trading houses are expected to show an average drop of over 30% from the record levels of 2022.

However, disruptions in supply chains and shortages of diesel and fuel oil have somewhat offset the decline in volatility related to Russian crude oil.

These profits have enabled commodity trading firms to bolster their positions as key providers of energy, metals, and food resources on a global scale.

With significant investments in oil refineries, storage facilities, power plants, and acquisitions of other trading companies, these firms are solidifying their roles in shaping global supply chains.

Moreover, the windfall profits have led to executives and partners within these firms becoming multi-millionaires, facilitating a generational shift in leadership as seasoned traders retire.

Despite the pressure to uphold legacies and navigate increased scrutiny, the influx of new leadership presents opportunities for innovation and growth within the commodity trading sector.

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Crude Oil

Oil Prices Surge as IEA Boosts Demand Forecasts and Trims Non-OPEC Supply Projections

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Crude Oil

Oil prices skyrocketed following the International Energy Agency’s (IEA) adjustments to its demand and supply forecasts.

The IEA’s latest report, released Thursday, sent shockwaves through financial markets as it unveiled a robust upward revision in global demand estimates while simultaneously trimming projections for non-OPEC oil supply.

With unparalleled confidence, the IEA bolstered first-quarter global demand growth forecasts, citing improved outlooks in the United States and heightened bunkering demand due to extended voyages circumventing geopolitical hotspots.

This unexpected surge in demand projections has injected a newfound sense of optimism into an industry grappling with uncertainties amid a shifting geopolitical landscape.

Moreover, the IEA’s decision to slash its projections for non-OPEC supply further fueled market exuberance.

Factoring in recent cuts from the OPEC+ coalition and reduced output from non-OPEC nations, the agency’s revised supply forecast sent a clear signal to investors: the tide is turning in favor of tightening supply dynamics.

This monumental shift in market sentiment was reflected in Brent crude futures, which surged by 0.86% to $84.75 a barrel, marking a significant milestone in the oil market’s recovery.

U.S. West Texas Intermediate (WTI) crude followed suit, climbing 1.04% to $80.55 a barrel, as traders reacted swiftly to the IEA’s bullish outlook.

As the energy landscape undergoes a paradigm shift, industry experts anticipate a sustained rally in oil prices, driven by robust demand growth and tightening supply dynamics.

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