Early last week the US dollar slid after data revealed that the services sector that have been supporting the economy contracted from 55.5 in July to 51.4 in August, before gaining back part of its losses as the odds of the Federal Reserve raising rates this month increases. While the majority of analysts have favoured September rate hike, I have my reservation for several reasons, one, the weak manufacturing sector and contraction in the activities of the services sector are some of the key criteria mentioned by the Fed Chair Janet Yellen during Jackson Hole speech for rate decision.
Two, even though the unemployment rate (4.9%) is near a record low and employers are said to be having trouble finding qualified and skilled workers, and are hesitant to dismiss employees, average hourly earnings rose less than expected in August. All these coupled with worse than expected second quarter economic growth rate (1.1%) are likely to compel the Federal Open Market Committee to hold back, at least to monitor improvement this third quarter before increasing borrowing cost.
Nevertheless, the retail sales that came out flat (0.0%) in July is due this week and expected to drop even further to -0.1 percent by economists, while the producer price index that measures consumer inflation is expected to rise just 0.1 percent in August from July 0.4 percent decline.
China, the world’s second largest economy, consumer price inflation dropped to its weakest in almost a year last month, but the producer price index moderated slightly from -1.0 percent to -0.8 percent in August. Also, China’s imports rose for the first time in almost two years last month as businesses restocked and wholesale inflation expectations rose. While, some analysts have interpreted it as a sign of steady economy, it is too early to deduce the direction of China’s economy, especially with exports slowing and credit risks rising as the People’s Bank of China continued to expand monetary easing.
In Australia, the seemingly positive Chinese data briefly aided Aussie dollar to 77.31 against the US dollar, before slumping nearly a whole cent to 75.36, after the RBA Governor Glenn Stevens said any further appreciation in the local currency could give Australia trouble. This, with a slowdown in economic growth rate in the second quarter to 0.5 percent and housing issues in some of the biggest Australian cities are issues the incoming RBA governor must address. This week, Australian unemployment rate, employment change and NAB business confidence are due.
The European Central Bank shocked the markets last week when Mario Draghi said the central bank doesn’t need to commit to fresh stimulus and left interest rates unchanged, even with inflation below 2 percent target and progress slowing as Brexit continued to weigh heavily on the world’s single largest market just six months to the end of the current Quantitative Easing. The 25-member Governing Council has decided to keep its main refinancing rate at zero, the deposit rate at – 0.4 percent and asset purchases at about 80 billion euros ($90 billion) a month until March 2017.
Draghi knows what has to be done — asset purchases will have to continue beyond March 2017 — but it seems too many of the council want to delay the decisions over what to buy and for how long,” said Richard Barwell, senior economist at BNP Paribas Investment Partners in London. “In the meantime, Draghi struggled manfully not to raise expectations of the inevitable.
This week, I will refer to the analysis of AUDUSD and EURUSD Forex three weeks ago.
Three weeks ago, I said Australian dollar is overpriced. Below are my exact words.
For a while the Australian dollar has been overpriced, but yet continued to gain against the US dollar and its peers. Last week, sellers jumped on the pair immediately Fed officials signals possibility of the Federal Reserve raising rates later in the year, and break the ascending channel started on May 30. This week, if the markets continue to price in that possibility, the strong dollar will likely weigh on the pair and may finally give us 0.7505 as explained last week. I believe a technical break below the ascending channel should be enough to force traders to start pricing in the 25 basis points cut. This week, I am bearish on this pair as long as 0.7673 resistance holds.
This week, the ECB further strengthen our position by keeping rates unchanged and downplaying stimulus expansion.
This pair has gained 487 pips since Aug 11th, and positioned for even more. Here is why I think this pair may offer buyers opportunity, the Euro-area has shown resilience since the U.K exit the European Union, and has complemented its moderate fundamental with strategic monetary policy. Another reason is the U.K post-Brexit retail sales report released last week, would likely reduce the heavy negativity surrounding the Brexit and boost the business activities of the Euro-area.
Technically, after breaking 1.4665 resistance on Wednesday, the Thursday’s candlestick that closed as a bullish pin bar on the daily time frame was the first sign of bullish continuation. While the morning start pattern formed on weekly time frame validate this stance. This week, as long as 1.4665 support holds, I am bullish on this pair with 1.5008 as the Forex target.
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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