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Forex Weekly Outlook December 10-14

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  • Forex Weekly Outlook December 10-14

Global foreign exchange market remained highly volatile despite temporary trade agreement reached by the U.S. and China. The slowing growth in China, the world’s second largest economy, and the unexpected drop in the number of jobs created in the U.S. in November following the Federal Reserve comment on possible slow down in rates hike in 2019 have weakened market confidence and increased global uncertainty going into the new year.

The U.S. stocks dropped $1 trillion in value last week as investors seem to be abandoning the high flying American stocks for emerging assets amid inverted yield curve that signals possible recession in 2019/2020.

Emerging markets, however, may not enjoy huge inflow of capital as previously projected because of the change in the European Central Bank’s monetary policy and current China’s economic position. ECB announced it will stop buying bond in January 2019 and commence normalization, which might involve rate hike. Therefore, most funds are likely to go to the Euro-zone (developed economy) with lesser risk.

This, may offer some form of support for the Euro currency in 2019 despite Brexit uncertainty, Italy debt crisis and slowing global growth.

Still, it all depends on the outcome of the Brexit vote on Tuesday in the United Kingdom, where MPs will vote to either approve and disapprove Prime Minister Theresa May’s draft Brexit deal.

In Canada, crude oil production will drop by 325,000 barrels per day starting from January 2019 as the oil-producing nation plans to reduce the gap between the price of U.S. WTI crude and the Canadian crude that rose to almost 50 at a point.

Experts believe the move will slow economic growth to 1.8 percent from the 2 percent predicted for 2019 as revenue generated from sales of crude oil is expected to drop in billions, partly due to falling oil prices and reduce production.

Meanwhile, OPEC+ agreed to cut 1.2 million barrels per day against the 1 million widely expected by the market to artificially boost price despite President Trump saying otherwise.

Giving the aforementioned reasons, USDJPY, NZDJPY, AUDUSD, and CADJPY top my list this week.

USDJPY

The growing uncertainty surrounding the U.S. assets following Federal Reserve’s rate comment, fewer than expected job creation in November and inverted yield curve is weighing on the U.S. dollar’s attractiveness, forcing investors to jump on haven currency, the Japanese Yen.

The USDJPY closed below the ascending channel for the first time in nine months last week to trade at 112.68 as shown above. Indicating an unusual selling pressure, especially after Meng Wanzhou, Huawei CFO was arrested in Canada on the order of U.S, a move China kicked against and insisted there will be consequences.

Therefore, a sustained break below the 113.03 resistance level should pressure price towards the 111.82 supports and vice versa.

NZDJPY

New Zealand dollar is a commodity-dependent currency that reflects China’s economic position. Since Wanzhou was picked up on Friday and Chinese inflation number disappointed after falling to 2.2 percent in November, Kiwi attractiveness drop against the Yen.

Forex Weekly Outlook December 10-14The pair was aided out of the 16 months descending channel by the temporary truce reached two weeks ago, however, with the new economic numbers pointing to possible slow down in Chinese economy and weak commodity outlook. The pair may fail to sustain its nearly two weeks bullish run above the descending channel.

This week, as long as price remained below the 77.71 resistance level breached for the first time in 6 months two weeks ago. I will look to sell this pair for 75.55 supports in line with previous analysis. However, 76.85 support stand in the way.

AUDUSD

Australian currency has been battered by weaker than expected economic growth in the third quarter, the economy expanded at a rate of 0.3 percent and 2.8 percent year on year, lower than the 0.6 percent and 3.5 percent expected, respectively. Also, consumer spending continued to drop amid weak wage growth and rising household debt. Meaning, the Reserve Bank of Australia may be forced to lower rate from the current 1.5 percent in 2019 to stimulate growth despite record low unemployment rate.

Like New Zealand, China is Australia’s largest trading partner, therefore, the Australian economy is indirectly impacted by the Chinese economy. Hence, all the factors mentioned above will equally weigh on the Aussie dollar.

The AUDUSD dropped about 200 pips last week after the disappointing GDP report to close at 0.7198. Since January 2018, the pair has dropped a total of 936 pips and broke out of the descending channel ahead of the US and China trade agreement five weeks ago.

Therefore, this is likely a temporary breakout given the aforementioned reasons. This week, as long as price remained below the 0.7314 resistance I am bearish on AUDUSD.

CADJPY

Despite better than expected unemployment rate of 5.6 percent and over 94,000 jobs that were created in Canada in November, the Canadian currency dropped against it counterparts to close lower last week.

The Bank of Canada held interest rate unchanged at 1.75 percent as expected but warned the economy could be heading for a slowdown in the final quarter of the year.

This was after the oil-producing nation announced it would cut production by 325,000 or 8.7 percent in January to aid price, a move believed by most experts would hurt economic productivity next year as national revenue is expected to drop.

Also, the economy grew at 2 percent rate in the third quarter, down from 2.9 percent recorded in the second quarter. Indicating possible slowing growth.

Forex Weekly Outlook December 10-14Technically, the pair closed outside the ascending channel for the first time in nine months to validate downward pressure. Therefore, because of the renewed interest in haven currency, Yen, especially in a week of Brexit vote. Investors are likely to jump on haven currency to curb risk exposure.

Hence, I am bearish on CADJPY and will look to sell below the ascending channel for 82.41 support.

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.

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Naira

Naira Gained 0.08 Percent to N414.73 Against the United States Dollar on Monday

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Naira - Investors King

The Nigerian Naira gained against the United States Dollar on Monday after falling to a record low of N422 per US dollar on Friday at the official forex window.

The local currency opened at N414.46 to a United States Dollar, a 0.15 percent improvement from Friday’s closing price.

Naira dropped as low as N425 to a United States Dollar at the spot forex market and to N429.50 at the forward forex market before closing at N414.73 to a United States Dollar at the spot forex market. Forex traders traded $172 million at the official forex window on Monday.

Forex scarcity across key foreign exchange segments and the decision of the central bank of Nigeria to halt the sale of forex to Bureau de Change operators continue to impede forex access in Africa’s largest economy.

Vice President Osinbajo had suggested that the apex bank should look to adopt a new forex policy to better close the gap between the black market and official rates. At the unregulated black market, traders are selling at N570 to US dollar.

This, the Vice President said was what was sustaining the black 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!, stated Laolu Akande, Senior Special Assistant to the President on Media & Publicity, Office of the Vice President.

“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.”

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Naira

Naira Plunges to Record Low of N422/US$1 at Official Market

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Naira Dollar Exchange Rate - Investors King

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.

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Naira

Osinbajo Explains Why Forex Policy Should Discourage Arbitrage and Corruption

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Naira Exchange Rates - Investors King

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.”

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