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RBA Holds Rates Amid Plunge in Iron Ore Prices

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Cash Rate
  • RBA Holds Rates Amid Plunge in Iron Ore Prices

The Reserve Bank of Australia left interest rates unchanged on Tuesday following fall in global iron ore prices and weak economic growth.

The central bank kept rates at a record-low of 1.5 percent, hoping that increase job creation will help lift wages and pressure prices.

However, rising household debt and slow wage growth are likely to hurt consumer spending going forward as record low unemployment rate and rise in labor force participation has failed to lift wage growth.

According to the RBA governor, Philip Lowe, “Wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labor market should see some lift in wage growth over time. Inflation also remains low and is expected to pick up gradually as the economy strengthens.”

Also, while a large infrastructure investment is supporting consistent growth in the non-mining industry, this growth needs to be consolidated to offset uncertainty from the mining sector as China looks to reduce Iron Ore importation to curb extreme air pollution.

The rising household debt in Australia remained a concern, especially after reaching a record high of 194 percent, yet wage growth remains weak. Another indication of possible drop in consumer spending in the future if earnings failed to pick-up on a broader scale. Therefore, it is unlikely that the RBA would hike rates without signs of consistent wage growth.

“Until wage growth begins to improve there is no urgency for the Reserve Bank to hike the cash rate,” said Callam Pickering, economist at global job site Indeed, who previously worked at the central bank. “Without a strong contribution from wages, we consider it unlikely that core inflation will push above the lower end of the RBA’s target band of 2-3 percent.”

The Australian dollar declined from 78.17 cents against the U.S. dollar to 77.91 cents at 3:04 p.m in Sydney.

AUDUSDDaily

As projected in the forex weekly outlook, a sustained break below the 77.84 cents would renew sellers’ interest, especially now that the markets are somewhat clear the RBA is not ready to tighten its monetary policy just yet. This should open up our second target, 76.21 cents as shown above.

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.

US Dollar

CBN Warns Against Rejection of Old and Lower US Dollar Bills

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Global debt

The Central Bank of Nigeria (CBN) on Tuesday has warned both the Deposit Money Banks (DMBs), Bureau De Changes and other forex dealers against rejecting old and lower US dollar denominations.

In a circular dated April 9th, 2021 and signed by Ahmed B. Umar, Director, Currency Operations Department, CBN, the apex bank said it has received several complaints from members of the public on the rejection of old and low denominations of US Dollar bills by authorised forex dealers operating in the country.

The CBN, therefore, mandated all DMBs/authorised forex dealers to accept both old series and lower denominations of United States Dollars (USD) that are legal tender for deposit from their customers.

The leading bank added that it will not hesitate to sanction any DMB or other authorised dealers who refuse to accept old series and lower denominations of US dollar bills from their customers.

Also, the apex bank warned all authorised dealers to desist from defacing and stamping US Dollar Banknotes as such notes always fail authentication test during processing and sorting.

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Naira

Naira Remains Under Pressure Amid Weak Macro Fundamentals

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Naira Dollar Exchange Rate

The Nigerian Naira plunged as low as N422 to a United States Dollar on the NAFEX window on Wednesday before moderating to N410 following a series of weak macroeconomic fundamentals released in recent weeks.

Nigeria’s inflation rate increased by 18.17 percent year-on-year in March while the unemployment rate rose to 33.33 percent with new job creation hovering at a record low amid weak economic productivity.

The commodity-backed currency traded at N486 to a US Dollar on the parallel market popularly known as the black market.

Against the British Pound, the local currency was exchanged at N670 and N577 to a Euro common currency.

At the Bureau De Change segment of the foreign exchange market, Naira traded at N482 per US Dollar; N670 per British Pound and N580 to a Euro.

In an effort to up revenue generation and ease exposure to the unstable global oil market, the Federal Government of Nigeria had removed electricity tariffs, fuel subsidy, introduced other import related charges and devalued the local currency more than three times in the last 12 months despite the negative impact of COVID-19 on the masses.

The series of adjustments dragged on economic productivity as importers and other forex-dependent businesses struggle with persistent dollar scarcity largely due to low foreign reserves of $35 billion caused by weak crude oil production and OPEC production cap.

The apex bank’s inability to service the economy with sufficient dollar to ease liquidity challenges in spite of various measures introduced recently to lure diaspora to remit more escalated prices of goods while the surge in electricity tariff, petrol price and other increments were passed on to already stressed customers.

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US Dollar

Dollar Drops as Traders Prepare for Inflation Data

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Forex Weekly Outlook October 31-November 4

The dollar slipped on Monday towards a three-week low as Treasury yields traded near recent lows and traders awaited crucial U.S. inflation and retail sales data in coming days.

Elsewhere, it was a quiet start to a data-heavy week for foreign exchange markets. The euro climbed back above $1.19 while the British pound rebounded from a two-month low.

The dollar’s performance has been tied to U.S. Treasury yields for most of 2021, after concern about rising inflation in the United States and a stimulus-fueled economic rebound triggered a jump in Treasury yields in February.

A fall in U.S. yields last week triggered the worst week for the dollar in 2021. With yields inching lower on Monday, it was back under pressure.

Federal Reserve Chairman Jerome Powell said in a U.S. media interview released on Sunday that the U.S. economy was at “an inflection point” and looked set for a strong rebound in the coming months, but he also warned of risks stemming from a hasty re-opening.

Investors are now waiting for U.S. March inflation data due on Tuesday.

“We are set to see the first evidence of the much anticipated surge in inflation that is widely expected through the coming months as base effects from a year ago begin to take effect as the sharp declines post-COVID start to fall out of the annual calculations,” MUFG analysts said.

They said the dollar’s fortunes could well “remain linked to 10-year yields”.

The benchmark 10-year Treasury yield was at 1.664% after dropping to as low as 1.6170% last week. It had surged to a more than a one-year high of 1.7760% on March 30.

The dollar index, which measures the U.S. currency against a basket of currencies, weakened 0.2% to 92.03. The euro initially dropped but later recovered and was up 0.1% to $1.1915.

Bitcoin traded above $60,000, closing the gap to its record high.

Against the pound the dollar initially gained before reversing course. The British currency was last up 0.5% at $1.3763 after briefly touching a two-month low of $1.3669 as traders cheered the latest phase of the government’s economic re-opening plan.

The dollar fell 0.3% to 109.33 yen versus the Japanese currency.

U.S. dollar net short positions have fallen to their lowest in nearly three years, according to data published on Friday.

ING analysts noted that speculators had cut their net short dollar positions for the 12th consecutive week, which could prove a headwind for further dollar gains.

“At this stage, the dollar has lost all its positioning “advantage”, having a neutral speculative positioning, which suggests we should no longer see dollar rallies against most G10 currencies exacerbated by the unwinding of USD shorts,” they wrote.

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