- Market Outlook Jan 28 – Feb 1
This week will set the tone for the rest of the year as investors await Federal Reserve position on rate increase, Italy’s GDP to validate slowdown in Europe’s third-largest economy, Chinese Purchasing Managers Index to assess the level of global slow down, Australia’s inflation report to see if the improved unemployment rate and 21,600 jobs created pressured prices in December, BOJ monetary policy after lowering inflation projection for 2019 and the number of jobs created in the U.S in January following government shutdown.
The International Monetary Fund lowered its global growth projection for 2019 from 3.7 per cent to 3.5 percent last week, citing trade disputes and slowing growth in China after data showed the economy grew at a 28-year low in 2018. Signalling the effect of trade war on the world’s second-largest economy despite the People’s Bank of China’s stimulus to enhance productivity and sustain growth.
The weaker than expected growth stalled commodity prices – halted crude oil bullish move- as market confidence drop on possible slow down in oil demand. China is the world’s largest importer of crude oil.
Still, despite the increase in global risk, haven assets (currencies) failed to attract enough buyers to sustain 2018 growth momentum as investors fear risks could spread across the financial markets with the slowing growth in Euro-area, Brexit uncertainty, U.S shutdown and Fed wait and see approach.
In Euro-Area, the Bank of Italy cuts its 2019 growth projection for Italy from 1 percent to 0.6 percent, while the European Central Bank maintained current interest rates and warned on rising risks to growth.
“The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility,” Draghi said at a press conference.
The Euro currency dropped to a month-low against the U.S dollar after Mario Draghi, the ECB president, acknowledged that near-term data are likely to be weaker than expected. Further validating global perspective after a series of purchasing managers index showed growth in the region is slowing down. This week investors will look for more clues in the Italian economic report and ECB monetary policy to better assess the level of slowdown in the region.
Crude oil remained in a range ahead of U.S-China meeting this week, a positive outcome should boost oil outlook and support emerging assets. Still, the U.S. Fed’s monetary stance will determine capital inflow into the emerging markets.
Naira Gained 0.08 Percent to N414.73 Against the United States Dollar on Monday
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.”
Naira Plunges to Record Low of N422/US$1 at Official Market
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!
At the black market, traders exchanged Naira at N565 to a United States Dollar on Thursday.
Osinbajo Explains Why Forex Policy Should Discourage Arbitrage and Corruption
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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