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Australia’s Rate Cut, Pros and Cons

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There are insinuations that Australia could cut rates in August, if the Reserve Bank of Australia Go-ahead and reduce the cash rate by 25 basis points to 1.5 percent, we could see the Aussie dollar weaken and pairs like AUDJPY breaking this year low of 72.42.

This is because earlier today, Glenn Stevens said the economic outlook remains moderate, but that any appreciation of the Aussie dollar could daunt current progress as the low exchange rate has been supporting the economy. So is bank liquidity injected to boost new job creation.

Here are the two take-away from RBA statement, low interest rates are key to growth, which suggest that the central bank will be looking to cut rate further to help its sudden surge in its trade balance deficit and weak retail sales (consumer spending) data that came out today.

Two, inflation pressure remains low and could force an additional stimulus in November if Consumer Price Index stay weak in the second quarter.

“Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time,” said Glenn Steven, governor of the Reserve Bank of Australia.

The uncertainty in the governor’s statement was clear — weak global outlook and post-Brexit effect could force lawmakers to make monetary adjustments soon.

In the weekly outlook, this was better adjudicated but it will help to price in the possibility of the Aussie dollar plunging further, peradventure the RBA lower cash rate.

 

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 long experience in the global financial market.

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Forex

CBN Starts Using N380/$ Official Rate, Expects to Make it Official Soon

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Godwin Emefile

CBN Moves Official Exchange Rate to N380 Per US Dollar

The Central Bank of Nigeria (CBN) has started using N380 as its official exchange rate for the United States dollar, according to a BusinessDay report.

The report noted that the apex bank recently disbursed the Federal Government’s monthly allocation to the three tiers of government using the new forex rate. Therefore, resulting in over N70 billion extra payment.

While the apex bank is yet to make an official announcement and still have the N360 exchange rate stated on its website as the nation official rate, an anonymous senior official of the central bank interviewed by BusinessDay said “yes, it is aimed at moving the rate closer to that of the Investors and Exporters (I&E) window, which traded at N386/$1 yesterday.

“From time to time, adjustment would continue to happen, either upward or downward in line with market fundamentals. Certainly, no single rate can be achieved, but we would keep moving towards I&E rate.”

It would be recalled that Godwin Emefiele, the Governor, CBN, about ten days ago told a group of foreign investors that the apex bank is working towards achieving a single foreign exchange rate around the Nigerian Autonomous Foreign Exchange Market (NAFEX)/Investors and Exporters’ Forex window.

The CBN governor had stated that “what we mean by exchange rate unification is moving towards the NAFEX. NAFEX is our dominant market for the purchase and sale of forex and it is a free market where everybody is free to sell their dollars and those who want to buy are free to buy dollars.

“That means that whether you are a businessman, a bank, CBN, and you have dollars, you can bring it to the market to sell and if you want to buy dollars, you can come to the market.

“Like some of you must have seen, three years before 2019, we saw a relatively stable forex market because the NAFEX rate and even the rate at which the central bank transacts business outside the NAFEX were substantially close to each other. So, the CBN will continue to pursue unification around the NAFEX.”

Meanwhile, the Nigerian Naira traded at a record low of N462 against the US dollar on the black market during the weekend.

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Naira Depreciates Further Against US Dollar on Black Market

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Naira Exchange at N462 Against  US Dollar on the Black Market

Naira resumed its bearish trend against the United States dollar during the weekend on the black market.

The local currency declined by N1 from the N461 it exchanged against the US dollar during the week to N462 during the weekend, its lowest exchange rate in almost two years.

This decline continues against the British Pound as the Naira depreciated by N2 from N560 it traded during the week to N562 during the weekend.

Against the Euro single currency, the Nigerian Naira remained unchanged at N502 it exchanged during the week.

On the Investors and Exporters Forex Window, the local currency was flat. Trading at N386 against the greenback, the same rate it exchanged on Thursday.

However, the total volume traded on the window declined by 48 percent from $204.90 million traded on Thursday to $105.05 million on Friday.

Market uncertainties continue to dictate Naira’s exchange rate as traders remained wary of eventualities following news that the Central Bank of Nigeria is working on a plan to unify the nation’s foreign exchange rate.

Also, the weak foreign reserves and low foreign exchange generation amid falling oil prices and rising forex demand from investors looking to move their funds out of the country are the main factors weighing on the Naira outlook.

Last week, Moody’s Investors Service said “Lower dollar inflows at a time when foreign currency borrowing will likely be more expensive for Nigerian banks will strain their foreign currency funding, despite substantial improvements compared to 2016.”

“Our moderate scenario where foreign-currency deposits decline by 20%, while loans remain constant, would increase rated banks’ funding gap to NGN1.5 trillion [$3.8 billion], and to NGN1.9 trillion [$5.0 billion] under our severe-case scenario of 35% foreign-currency deposit contraction, creating acute funding challenges.”

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Foreign-Currency Shortages to Render Nigerian Banks Vulnerable -Moody’s

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Forex Scarcity Renders Nigerian Banks Vulnerable

Nigeria’s banks to experience acute funding challenges as the drop in foreign currency deposits hit a record-low following COVID-19 pandemic disruption, stated Moody’s.

In a recent report titled ‘Renewed foreign-currency shortages highlight vulnerability for Nigerian banks‘ published by Moody’s Investors Service, a bond credit rating business of Moody’s Corporation, the drop in dollar deposits amid low oil revenue, volatile foreign investment and declined remittances from abroad due to COVID-19 pandemic are threatening to renew forex liquidity crisis of 2016-2017 on Nigerian banks.

“Lower dollar inflows at a time when foreign currency borrowing will likely be more expensive for Nigerian banks will strain their foreign currency funding, despite substantial improvements compared to 2016,” said Peter Mushangwe, Analyst at Moody’s.

“Our moderate scenario where foreign-currency deposits decline by 20%, while loans remain constant, would increase rated banks’ funding gap to NGN1.5 trillion [$3.8 billion], and to NGN1.9 trillion [$5.0 billion] under our severe-case scenario of 35% foreign-currency deposit contraction, creating acute funding challenges.”

According to Moody’s, oil and gas exports account for about 90 percent of Nigeria’s foreign currency revenue. However, with crude oil now trading at around $40 per barrel, far below its average of $65 per barrel in 2019 and $72 per barrel in 2018, Nigeria’s banks are expected to struggle to meet foreign-currency withdrawals in the next 12 to 18 months.

Moody’s said its rated “banks reduced their foreign currency funding gap to a combined NGN354 billion ($984 million) in 2019 from NGN1.436 trillion ($5.5 billion) in 2016. The ratio of foreign-currency loans to foreign-currency deposits at Moody’s rated banks dropped to 106% at the end of 2019 from 135% in 2016 as banks cut back on dollar loans while building up their dollar deposits.

“The smaller funding gap will enable the banks to better withstand unforeseen deposit withdrawals and likely higher borrowing costs. However, in the event of foreign currency deposits contracting by 20% or more, banks’ funding gaps will be significant.”

This further explained why the Nigerian Naira is trading at a record low of N461 against the United States dollar on the black market in recent weeks.

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