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Forex Weekly Outlook October 16-20

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  • Forex Weekly Outlook October 16-20

The mixed U.S. economic data and political uncertainty continued to weigh on the U.S dollar. Even though activities in the manufacturing sector rose to a 13-year high in September and services sector expanded at the fastest pace in 12 years last month, the consumer prices rose just 0.5 percent in the month, below the 0.6 percent projected by experts. Suggesting that increased job creation in these sectors has failed to pressure prices enough to validate Federal Reserve’s price projection.

This is one of the reasons the U.S. dollar dipped against its counterparts on Friday and likely to continue this week after President Trump disavow Iran’s deal. However, the weak US dollar should deepen industrial production as seen in August and September, while Saudi Arabia’s decision to cut crude oil export by 560,000 barrels per day in November is expected to further boost gasoline prices and subsequently pressure headline inflation towards the Federal Reserve’s 2 percent target in the final quarter of 2017.

However, the underlying fundamental factors would be temporary in accordance with Federal Reserve’s minutes of September 19-20 that showed policymakers are unclear if factors subduing inflation are just temporary or persistent. Therefore, agreed that incoming data are imperative to rate decision.

Also, even though the odds of rate hike in December may increase with the rise in headline inflation figure, the US dollar may not respond proportionally for two reasons; December rates hike has already been priced in, two, growing uncertainty in the U.S. and President Trump’s inability to push through with tax cut just yet will weigh on the US dollar attractiveness.

Therefore, growing political uncertainties in the country and across the world remains a concern, especially with the whole Euro-area facing populist uprising amid stagnant Brexit negotiation.

This week, I will be looking at AUDJPY, and NZDJPY, NZDUSD, and AUDUSD from last week.

AUDJPY

The Australian economy is struggling with weak retail sales and growing household debt that has eroded consumer spending power. However, weak iron ore price, the largest Australian export product also weigh on the economic outlook but investors and businesses are more concern about the Reserve Bank of Australia’s decision to maintain current monetary policy against other nations cutting back on stimulus amid improved global growth.

Despite these headwinds, the Australian dollar remains resilient in strong demand after dropping below 88.17 two weeks ago. One, because of the rebound in China’s import to 18.7 percent in September. Two, the surge in the attractiveness of emerging currencies following the less than expected consumer prices and the president Donald Trump refusal to sign Iran’s deal bolstered Australian dollar attractiveness last week as investors are risk-averse.

Forex Weekly Outlook October 16-20

However, while the currency has been favoured by growing uncertainties and improved global economic outlook, the Aussie dollar remained overpriced as stated previously and expected to dip against strong currencies like the Japanese yen, backed by strong and growing economic fundamental.

Therefore, despite the Japanese snap election due on October 22, I don’t see the AUDJPY topping the 22-month high of 90.29 after the bearish pin bar established 4 weeks ago. This week, as long as price remains below the 90.32 resistance level, I am bearish on this pair and will look to sell below 88.17 for 86.34 targets.

Last Week Recap

Improved emerging markets’ outlook bolstered the attractiveness of emerging currencies last week. While I doubt these currencies can sustain current upsurge against the US dollar and Japanese Yen in the long term. I will be standing aside this week to better assess price action and price in Chinese inflation number and revised Japanese industrial production due on Monday.

Similarly, I will be staying away from the EURUSD because of the low volume of trade and surge in risk level due to the growing uncertainty.

NZDJPY

Forex Weekly Outlook October 16-20

This pair failed to break the ascending channel last week. However, with the New Zealand inconclusive election, I do not see NZDJPY sustaining current bullish momentum for long. Therefore, I will be standing aside this week to monitor price action but would be selling at the first sign of wane as long as price remains below 81.02 levels.

AUDUSD

Forex Weekly Outlook October 16-20

The weak US consumer prices aided the attractiveness of the Aussie dollar against the US dollar last week. This week, I will be assessing the response of the parliament and the rest of the world to President Donald Trump’s refusal to sign Iran’s deal on Friday and how this plus China’s consumer prices due on Monday will change AUDUSD outlook going forward. Again, I am bearish on this pair on a long-term as I believe Australian dollar is overpriced but the heightened uncertainty continued to weigh on that projection, hence, the reason  I am standing aside this week.

NZDUSD

Forex Weekly Outlook October 16-20

Similarly, the New Zealand currency surged on growing emerging markets attractiveness and weak US dollar. But while Chinese new credit control policy is projected to affect exporting partners like New Zealand, the currency remains resilient amid rising commodity prices. again, I believe the rebound is temporary and merely aided by the US uncertainty. Therefore, the reason I am bearish on this pair as long as price stays below 0.7214, but I would be standing aside this week to better monitor price action and sell at the first bearish continuation signal.

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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CBN Resumes Forex Sales as Naira Hits N1,570/$ at Parallel Market

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The Central Bank of Nigeria (CBN) has resumed the sale of foreign exchange to eligible Bureau De Change (BDC) operators.

The decision was after Naira dipped to N1,570 per dollar in the parallel market,

CBN announced that it would sell dollars to BDCs at a rate of N1,450 per dollar. This decision aims to address distortions in the retail end of the forex market and support the demand for invisible transactions.

Following the CBN’s intervention, the dollar, which recently traded as low as 1,640 per dollar, has shown signs of stabilization.

The apex bank’s action is expected to inject liquidity and restore confidence among market participants.

BDC operators have welcomed the move. Mohammed Magaji, an operator in Abuja, noted that the dollar was selling at 1,630 per dollar.

He emphasized the market’s volatile nature but expressed optimism about the CBN’s intervention.

Aminu Gwadebe, President of the Association of Bureau de Change Operators of Nigeria, attributed the naira’s decline to acute shortages, speculative activities, and increased demand due to recent duty waivers.

He praised the CBN’s action as a necessary step to alleviate market pressures.

The CBN’s efforts include selling $20,000 to each eligible BDC, with a directive to limit profit margins to 1.5% above the purchase rate.

This strategy aims to ensure that end-users receive fair rates and to curb inflationary pressures.

The CBN’s ongoing reforms seek to achieve a market-determined exchange rate for the naira. As the naira continues to navigate turbulent waters, stakeholders remain hopeful that these measures will lead to a more stable and liquid forex market.

Market analysts suggest that sustained interventions and increased access to foreign exchange could help reverse the naira’s downward trend.

The CBN’s actions demonstrate a commitment to tackling the challenges facing the foreign exchange market and supporting Nigeria’s economic stability.

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Finance

Nigeria’s FX Inflows Leap 57% as CBN Steers Economic Confidence

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Nigeria’s foreign exchange (FX) inflows have surged by 57% over the past year, signaling newfound stability for the Naira.

Analysts attribute this growth to the Central Bank of Nigeria’s (CBN) consistent policies, which have bolstered investor confidence and enhanced market stability in Africa’s most populous nation.

Data from the CBN reveals that FX inflows rose to $8.86 billion in February 2024, compared to $5.66 billion in February 2023.

This increase is a testament to the effectiveness of the CBN’s strategic measures. Similarly, foreign exchange turnover skyrocketed 180% year-on-year to $240.64 million in February 2024.

“The upsurge in FX inflows reflects the positive impacts of increased interest rates and the relative stability of the exchange rate,” said Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting.

He noted that high interest rates in Nigeria are attracting investors seeking better returns compared to developed countries.

The CBN has actively engaged with foreign investors, addressing concerns and providing insights into monetary policy actions.

Olayemi Cardoso, the CBN governor, emphasized that investor confidence has been restored, partly due to the bank’s clearance of a $7 billion foreign exchange backlog.

New investments into Nigeria also increased significantly, reaching $1.24 billion in February 2024, compared to $0.33 billion in January 2024. This uptick is indicative of a more stable and attractive investment climate.

Analysts point out that improved oil production and higher global oil prices have significantly boosted FX earnings.

Also, government policies aimed at attracting foreign investment, along with strategic management of the exchange rate, have played pivotal roles in this economic revival.

The CBN’s efforts to diversify the economy and boost non-oil exports are starting to yield results.

Increased diaspora remittances, facilitated by better official channels and incentives, have further contributed to the rise in FX inflows.

While challenges remain, the positive trend in FX inflows suggests a more robust and stable economy, encouraging further investment.

Consistent and transparent economic policies are expected to enhance investor trust, stabilizing the Naira and fostering a more favorable exchange rate environment.

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Naira

Naira Hits Five-Month Low Amid Dollar Demand Surge

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Nigeria’s naira extended its losing streak to a fifth consecutive day as it slipped to its weakest level since March despite the Central Bank of Nigeria’s (CBN) interventions.

The naira closed at 1,577.29 per dollar on Monday, down from Friday’s N1,563.8 per dollar on FMDQ.

This decline comes despite the CBN’s efforts to stabilize the currency by injecting $122.7 million through dollar sales into the market.

However, analysts argue that these amounts were insufficient to balance the robust domestic demand for the greenback.

“The CBN has been in the market selling $50 million from time to time, which is not enough,” commented Carlo Morelli, senior portfolio manager at Azimut Investment SA.

Morelli attributes the persistent pressure on the naira to capital outflows and a lack of investor confidence in the currency, despite the central bank’s commendable efforts in tightening monetary policy and reducing naira liquidity.

Central Bank Governor Olayemi Cardoso has aggressively raised interest rates in an attempt to curb inflation and stabilize the naira.

The benchmark borrowing rate now stands at 26.25%, following an increase of 14.75 percentage points since May 2022.

However, the currency has weakened by approximately 70% against the dollar since exchange-rate controls were eased last year.

“Restoring foreign exchange broad confidence is the last step, and the huge volatility in May delayed the return to normalcy,” Morelli added.

“Many foreign investors are still waiting for more evidence of stability before considering Nigeria investable.”

The naira’s decline makes it the second-worst performing currency tracked by Bloomberg in 2024, trailing only the Lebanese pound.

The recent depreciation has been fueled by both seasonal dollar demand and ongoing investor skepticism.

The central bank’s next policy decision, set for July 23, is expected to address these issues. Monday’s data showing annual inflation quickened to 34.2% in June suggests that another rate hike might be on the horizon.

In a bid to bolster the naira, the central bank has increased Nigeria’s foreign exchange reserves to $35 billion as of July 8, the highest level since May 30, 2023.

This boost is attributed to recent loans from the World Bank and the African Export-Import Bank.

Omobola Adu, an analyst at BancTrust & Co. Investment Bank, noted that recent pressure on the naira has also stemmed from corporates and individuals preparing for foreign vacations.

“Boosting the supply of FX into the country remains crucial for the government to alleviate pressure on the naira,” Adu stated.

He suggested that a eurobond or local dollar bond sale later this year, along with increased support from multilateral institutions, could help shore up reserves.

Despite these challenges, Central Bank Governor Cardoso remains optimistic, asserting that the worst of the currency’s volatility is over.

He reiterated this sentiment on Thursday in Lagos, addressing business leaders and highlighting improvements in crude output and capital inflows as positive signs.

Nigeria, Africa’s largest crude producer, relies heavily on oil sales, which account for at least 80% of its export earnings.

The country’s combined crude oil and condensate output rose to 1.5 million barrels per day in June, the highest since February, according to the upstream petroleum regulatory commission.

“While the naira may be undervalued, for the naira to stabilize and perhaps regain ground, large portfolio and capital inflows are needed,” said Samir Gadio, head of Africa strategy at Standard Chartered Plc in London.

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