- Forex Weekly Outlook October 17-21
The US dollar gained against most of its counterparts last week, despite the consumer confidence index (87.9) falling to a year low in September. The economy continued to create jobs by maintaining a four decade low unemployment benefits at 246,000 in the week ended Oct.8, same as previous week.
Also, consumer spending rebounded in September surging 0.6 percent from previously declining 0.2 percent in August, while the producer price index rose 0.3 percent for the first time in three months, indicating that consumer prices may be picking up as the increase in costs (energy and food) are pass-on to consumers.
This is one of the reasons consumer confidence dropped in the said month, as consumers are likely to react to increase in costs, and also it explained Fed’s position as to why aggressive steps “high-pressure economy” may be needed to lower unemployment further and boost consumption simultaneously, even if it means at a higher inflation rate.
Accordingly, the Fed Chair Yellen Janet during 60th annual economic conference in Boston, Massachusetts on Friday noted that extreme economic events like the world is currently experiencing have challenged existing economic views in terms of what drive growth (demand and supply).
While, admitting this will necessitate further research from the profession and the Fed, she said there were evidences from post-financial crisis that aggregate increase in demand lead to appreciable effect on aggregate supply against widely accepted notion that an economic output over the long-term is equal to its resources (labour, costs and existing technologies).
This was because at a more accommodative monetary policy (interest rate 0.5%), unemployment rate has remained nearly stagnant and so is the output. Therefore, throwing the possibility of a December rate hike in doubt, especially saying that the influence of the labour market, that the financial markets thought will force the Fed to hike rates to curb inflation above its 2 percent target, on inflation rate is weaker than had been commonly thought prior to the financial crisis. However, consumer prices report due on Tuesday and building permit of Wednesday will help assess the level of inflation so as to determine how close to target the Fed really is and economic growth.
In China, producer prices rose 0.1 percent for the first time in five years, bolstering consumer inflation to 1.9 percent in September. However, exports fell 10 percent from a year earlier, reducing the world second largest economy’s trade surplus to $42 billion, even with weaker Yuan. This suggested that weaker Yuan have little effect on exports as the global slowdown has impacted shipments from both the European Union and United Kingdom. For instance, exports to the EU has dropped 9.8 percent, while that of U.K. and U.S have declined by 10.8 percent and 8.1 percent respectively.
While the probability of exports turning positive is high due to continuous weakening of the Yuan by the Chinese central bank and the usual surge in Christmas orders, sustainability remains the question. Next week, third quarter GDP report, industrial production, fixed asset investment and National Bureau of Statistics (NBS) due on Wednesday will further throw light on the state of Chinese economy going forward.
In the UK, the sterling continued its decline against the US dollar and has so far lost 6 percent this month and down 17 percent this year. While Goldman Sachs and other analysts have said the embattled currency is still in for more punishment, the lower exchange rate will boost oversea orders and pressure consumer prices (inflation) above the Bank of England (BOE) 2 percent target.
This, will likely prompt BOE to either shun rising inflation and concentrate on growth as suggested by Mark Carney last statement on the economic outlook or attempt to curb inflation and risk growth. Inflation rate, producer prices, average earnings, consumer spending and unemployment rate are due this week, but these macro data are likely to have no positive effect on the economy as long as the confidence in the British market remains weak.
Overall, I expect the US dollar to lose some ground this week as investors look to understand Fed’s statement on the economy and come to terms with the possibility of the apex bank maintaining current interest rate while monitoring improvement across key sectors. This week I will be looking at CADJPY, USDCAD and EURNZD.
This pair plunged to four year low last month, largely due to the Yen continuous gain and low oil prices that weigh on oil-dependent loonie. But after OPEC members agreed to cut production in September the pair halted losses and has since gained 386 pips. Although, Canada economic data remain weak, there is a possibility that a rebound in oil prices will fuel an increase in investment and improve exports.
Technically, after a bullish pin bar was formed three weeks ago and the failure of the pair to break 77.05 support a week later showed this pair has halted the downward trend. But a sustained break of 79.23 resistance is needed to validate the bullish trend. This week, as long as price remains above 79.23, I am bullish on this pair this week with 82.05 as the target.
With the US dollar posed to retreat this week, coupled with the Russia and Saudi Wednesday’s agreement in Turkey to go ahead with production cut, this pair is expected to extend its decline this week. This week, I am bearish on this pair as long as 1.3142 holds with 1.3033 as the target.
With the euro-single currency enmeshed in Greece debt and Brexit issues this pair will likely extend its decline this week – especially if last week bearish pin bar is taking into consideration. This week, as long as price remains below 1.5469 I am bearish on this pair this week with 1.5180 as the first target.
The EURUSD hit our first target at 1.1019 last week, but this week I will be standing aside on this pair to evaluate Euro-area economic situation in relation to how the financial markets react to the greenback after Fed’s speech.
AUDUSD touched our 0.7505 target and immediately lost most of its gains for the week. This week, I will be standing aside on Aussie to monitor market reaction to its current position for two reasons, one, the Aussie dollar does not have much room to grow on the bullish side considering its nearing 78.34 US cents, its one-year peak. Two, the US dollar is likely to give up part of its gains so far this week, and with buyers adding to their long positions without substantial data to explain the reason for Thursday and Friday attractiveness. I will be standing aside to better assess the situation.
This pair was 44 pips short of hitting our target at 0.6989 last week, but this week I will be waiting for confirmation of trend continuity to sell per adventure Kiwi extend its decline against the greenback, but for now I will be standing aside also, while monitoring data from RBNZ and market reaction to the current position of this pair.
Foreign-Currency Shortages to Render Nigerian Banks Vulnerable -Moody’s
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.
Naira Records Marginal Gain Against the US Dollar on Thursday
Naira Gains Marginally Against the US Dollar On Thursday
The Nigerian Naira gained slightly against the United States dollar both on the black market and Investors and Exporters’ Forex Window on Thursday
On the black market, the local currency gained N1 from the N462 it exchanged against the US dollar on Wednesday to close at N461 on Thursday.
This slight improvement continues against the Euro single currency on Thursday as the Naira gained N2 from N505 it traded on Wednesday to N502 on Thursday.
However, the Nigerian Naira was unchanged against the British Pound. The local currency traded flat at N560 against the British Pound.
On the Investors and Exporters’ Forex Window, the Naira gained 0.13 percent or 50 kobo against the US dollar to trade at N386. This was after trading as low as N389.75 during the trading hours of Thursday.
Activity level rose by almost 2000 percent from $10.37 million turnover recorded on Wednesday to $204.90 million on Thursday.
The Nigerian Naira remained under pressure as dollar scarcity continues to hurt its value and sentiment.
Also, the lack of clear policy direction is one of the reasons Nigeria continues to struggle with needed capital importation and huge forex demand from investors looking to repatriate their funds.
The Federal Government recently raised fuel pumping price at a time when most nations are reducing costs to ease economic burden on their citizens.
This move already rejected by the Nigeria Labour Congress (NLC) on Thursday highlighted the nation’s lack of economic direction despite numerous announcements by the central bank and federal government to mitigate negative impacts of COVID-19 on the economy.
Naira Exchanges at Record-low Against US Dollar on Black Market
Naira Trades at Record-low of N462 Against US Dollar
The Nigerian Naira plunged to a record low of N462 against the United States dollar on Wednesday on the black market as scarcity persists.
The local currency lost N2 against the US dollar from the N460 it traded on Tuesday to N462 on the black market on Wednesday. While against the British Pound, the Naira remained unchanged at N560. The same rate it exchanged on Tuesday.
Similarly, the Nigerian Naira remained flat at N505 against the Euro single currency on the black market.
On the Investors and Exporters Forex Window, the local currency remained unchanged at N386.50 to a US dollar, the same rate it was exchanged on Tuesday.
Activity on the platform dropped on Wednesday as daily turnover stood at $10.37 million, below the $14.37 that was exchanged on Tuesday.
Scarcity across key foreign exchange segments continues to hurt the nation’s currency and economic outlook due to the inability of investors and businesses to access foreign exchange needed to import raw materials into Africa’s largest economy.
This was evident in the broad-based decline recorded in the manufacturing sector in the month of June.
Also, the unconfirmed report that the Federal Government is looking to converge the nation’s exchange rate due to the pressure from the International Monetary Fund (IMF) added to Naira pressure as speculators and hoarders now have reason to remain in business.
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