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Euro Is Nothing But a Flow Show and Analysts Are Getting Worried

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European
  • Euro Is Nothing But a Flow Show and Analysts Are Getting Worried

The euro is on a tear, U.S. investors are snapping up European stocks — and traditional theories to justify the shared currency’s spirited advance have broken down, as investors luxuriate in a climate of low volatility.

That’s the market landscape as painted by Deutsche Bank AG strategist George Saravelos. Given the parallels, he suggests caution after the euro’s 7 percent rally against the dollar this year.

“Something strange has happened to the euro in recent months,” Saravelos wrote in a client note Wednesday. “Almost all traditional drivers that usually ‘explain’ the price action have broken down.”

The bank’s currency correlation model — which includes factors such as interest-rate differentials, the relative performance of equity markets, and spreads of southern European government bonds — is flashing red.

Correlations between the euro’s rolling three-month performance against the dollar and other such factors were last at current subdued levels in early 2014 and 2007. That suggests unhedged equity inflows from foreign investors piling into European equity and bond markets — thanks to better-than-expected economic data, and easing political risk — have driven the currency’s recent outperformance, according to Deutsche Bank.

“Near-term, it suggests that there may be an underlying flow story that is impervious to other market drivers and is supportive of the euro,” Saravelos said. “Medium-term, the current ‘decorrelation’ is usually associated with periods of very low volatility and would suggest caution in extrapolating recent euro strength.”

As such, the German bank, the world’s fifth-largest currency trader by market share according to a Euromoney Institutional Investor Plc, reckons the euro will fail to break out against the top end of its 1.05 to 1.15 per dollar range, as traditional currency drivers re-assert their influence.

Risks to the currency’s bull run are rising: The euro fell as much as 0.67 percent Wednesday after a Bloomberg report on a potential switch in the European Central Bank’s inflation outlook signaled the prospect of a dovish outcome in tomorrow’s policy decision.

The counterpoint comes from Morgan Stanley, which this week raised its target for the single currency citing “material upside surprises in recent growth data, positive political developments and a view that investment inflows to the eurozone will continue.”

Morgan Stanley projects 1.16 per dollar by the second quarter of 2018, a 20 percent upside from its previous forecast, compared with the median projection of 1.13, according to analysts surveyed by Bloomberg.

Linking currency moves to capital flows isn’t straightforward when markets move in lockstep, but an April study by Deutsche Bank suggests currency traders should follow flow data closely: It concluded that outsize inflows into exchange-traded equity funds can predict moves in a number of liquid currencies, including the euro.

Saravelos’s note of caution also finds support from Jens Nordvig, founder of Exante Data, a New York-based research firm.

“Fundamental models for EURUSD, based on rate differentials, would have predicted a relatively stable exchange rate in recent months,” Nordvig, who was ranked No. 1 strategist by Institutional Investor for five years through 2015, in his previous capacity as head of currency research at Nomura Holdings Inc., wrote in a client note. “In our analysis, this ‘euro residual’ is tied to certain flow forces, which have turned euro bullish lately.”

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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Naira

Naira’s Upsurge Strains Nigeria’s Foreign-Exchange Reserves

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New Naira notes

As the Nigerian Naira continued to rebound from its record low against its global counterparts, the nation’s foreign exchange reserves has been on the decline, according to the data published by the Central Bank of Nigeria (CBN) on its website.

CBN data showed liquid reserves have plummeted by 5.6% since March 18 to $31.7 billion as of April 12, the largest decline recorded over a similar period since April 2020.

The recent surge in the Naira follows a series of measures implemented by the Central Bank to liberalize the currency market and allow for a more flexible exchange rate system.

These measures included devaluing the Naira by 43% in January and implementing strategies to attract capital inflows while clearing the backlog of pent-up dollar demand.

Charles Robertson, the head of macro strategy at FIM Partners, acknowledged the Central Bank’s efforts to restore the Naira to a realistic exchange rate, suggesting that it aims to stimulate investment in the local currency and enhance liquidity in the foreign exchange market.

Despite the rapid depletion of foreign-exchange reserves, Nigeria still maintains a significant cushion, bolstered by a rally in oil prices and inflows from multilateral loans.

Gross reserves of approximately $32.6 billion provide coverage for about six months’ worth of imports, according to the International Monetary Fund.

The Central Bank’s disclosure last month that it had cleared a backlog of overdue dollar purchase agreements, estimated at $7 billion since the beginning of the year, indicates progress in addressing longstanding currency challenges.

However, uncertainties remain regarding the extent of dollar debt retained by the Central Bank as revealed by its financial statements late last year.

Furthermore, the decline in foreign-exchange reserves persists despite a surge in inflows into Nigeria’s capital markets, driven by interest rate hikes and increased attractiveness of local debt.

Foreign portfolio inflows exceeded $1 billion in February alone, contributing to a total of at least $2.3 billion received so far this year, according to central bank data.

Analysts remain cautiously optimistic about the trajectory of Nigeria’s foreign-exchange reserves, anticipating stabilization or potential growth fueled by anticipated inflows from Afreximbank, the World Bank, and potential eurobond issuance.

Also, the resurgence of oil prices and the expected return of remittances through official channels offer prospects for replenishing reserves in the near future.

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Naira

Dollar to Naira Black Market Today, April 17th, 2024

As of April 17th, 2024, the exchange rate for the US dollar to the Nigerian Naira stands at 1 USD to 1,50 NGN in the black market, also referred to as the parallel market or Aboki fx.

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As of April 17th, 2024, the exchange rate for the US dollar to the Nigerian Naira stands at 1 USD to 1,50 NGN in the black market, also referred to as the parallel market or Aboki fx.

For those engaging in currency transactions in the Lagos Parallel Market (Black Market), buyers purchase a dollar for N1,70 and sell it at N1,060 on Tuesday, April 16th, 2024 based on information from Bureau De Change (BDC).

Meaning, the Naira exchange rate improved when compared to today’s rate below.

This black market rate signifies the value at which individuals can trade their dollars for Naira outside the official or regulated exchange channels.

Investors and participants closely monitor these parallel market rates for a more immediate reflection of currency dynamics.

How Much is Dollar to Naira Today in the Black Market?

Kindly be aware that the Central Bank of Nigeria (CBN) does not acknowledge the existence of the parallel market, commonly referred to as the black market.

The CBN has advised individuals seeking to participate in Forex transactions to utilize official banking channels.

Black Market Dollar to Naira Exchange Rate

  • Buying Rate: N1,050
  • Selling Rate: N1,040

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Naira

Naira Appreciates to N1,136/$ Officially, N1,050/$ Parallel Market

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The Nigerian Naira appreciated to N1,136 against the United States Dollar at the official market and rose to N1,050 at the parallel market.

At the official foreign exchange market, data from the FMDQ Exchange revealed that the Naira strengthened by 6.1 percent or N69 from its previous rate of N1,205/$ recorded on Friday to N1,136/$ on Monday.

This surge underscores the effectiveness of recent foreign exchange directives implemented by the Central Bank of Nigeria (CBN), aimed at stabilizing the Naira and bolstering liquidity in the market.

At the parallel market, the Naira appreciated to N1,050 against the Dollar, reflecting an improvement in the currency’s value in informal trading circles.

This resurgence has brought renewed hope to traders and businesses operating in the informal sector, as they anticipate further strengthening of the Naira in the coming days.

The improved exchange rate follows a series of strategic interventions by the CBN to address foreign exchange challenges and stabilize the Naira.

The positive momentum in the forex market has been further reinforced by a surge in total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM), which increased by 41.7 percent to $3.75 billion in March, compared to $2.64 billion in February.

Commenting on the recent developments, analysts at Afrinvest expressed optimism about the continued strengthening of the Naira, attributing it to the CBN’s intensified efforts to bolster liquidity in the market.

They anticipate further improvements in the exchange rate as the apex bank maintains its proactive stance on forex management.

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