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Forex Weekly Outlook September 19 – 23

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CBN

The US dollar gained against all the major currencies last week, following better than expected inflation report released on Friday. This, coupled with the comments from Federal Reserve officials bolstered the attractiveness of the US dollar as investors/traders jumped on it in anticipation that the Federal Open Market Committee (FOMC) will raise borrowing cost.

While, speculations formed the bulk of the unsustainable dollars’ gains. It is imperative to note that the dollar’s gains was partly the reason import prices dropped from an increase of 0.1 percent in July to a decline of-0.2 percent in August, this drop in prices is expected to weigh on September consumer price index and damped August recorded progress.

Again, the drop in consumer spending (-0.3%) and worse than expected producer prices (0.0%) record in August are pivotal to Fed’s rate decision — especially with industrial production (-0.4%) and capacity utilization (75.5%) declining at the same time.  Hence, the disconnection between macro data and current dollar bullish run should be closely watched per adventure the Bank of Japan decided as that will either shift current dollar gains to the Yen or boost it even further. This week, volatility is expected as the FOMC meets to announce economic projection and federal funds rate on Wednesday.

In Australia, the unemployment rate dropped to three-year low of 5.6 percent in August, despite the loss of 3,900 jobs. The contradictory result confirmed Capital Economics insinuation that the fall in jobs was a bit bigger than it looked. Also, the weak wages and low consumer spending at a record low unemployment rate point to an economy that is struggling and grossly ambiguous.

In the UK, the pound lost part of its gains last week after data revealed that producer price input dropped to 0.2 percent from 3.1 percent and that consumer prices remained unchanged at 0.6 percent even with the weak pound. Although, unemployment rate remained 4.9 percent, average earnings dropped from 2.5 percent to 2.3 percent and consumer spending managed to exceed expectation by declining 0.2 percent against the 0.4 percent widely expected.

This week, the world awaits the Bank of Japan decision (BOJ) after over three years of unconventional monetary policy called qualitative and quantitative easing (QQE). The Hahuriko Kuroda team is expected to expand its monetary policy in an effort to boost exports and fight off insistent low consumer prices, and also halt the continuous gain of the Yen. Accordingly, the financial markets will experience high volatility this week as both the Fed and BOJ attempt to further their economic growth amid high global risks and uncertainties.

Overall, the financial market is yet to find its rhythm as central banks strive to strike a balance between fiscal and monetary policy. This week, GBPJPY and EURAUD top my list.

GBPJPY

After the series of weak macro data released last week, the pound lost more than two weeks’ gains against all the major currencies. While the reports were not that bad, the impact on the pound showed how vulnerable the UK economy is to eventualities, as such greater attention should be given to this pair this week. Especially with the Fed and BOJ economic statement due on Wednesday.

gbpjpydaily

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Technically, after breaking 134.90 support level established in June. This pair has changed its outlook to the downside, while we need the BOJ decision to further validate this prediction. I am bearish on GBPJPY with 129.85 as the target, as long as 134.90 resistance holds.

EURAUD

Last week, our target hit at 1.5000. But since then Euro-area economic outlook has changed after Mario Draghi decision to leave rates unchanged. The Euro-area industrial production dropped from 0.8 percent to -1.1 percent, while both German and Euro-area ZEW economic sentiment also plunged. All these combined with weak manufacturing sector and post-Brexit uncertainties are weighing on the euro-zone economic outlook.

eurauddaily

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While, the Australian economy on the other hand, improved its unemployment rate to three-year low and has consistently used its broad financial base to enforce investors’ confidence in its economy, even though capital importation has seen a decline in recent time. The economy remained vibrant against the Euro single currency. This week, I am bearish on EURAUD as long as 1.5000 resistance holds, 1.4777 remains the first target and 1.4665 target two.

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.

Forex

Bureau De Change Operators Begs CBN to Approve Electronic Forex Trading

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BDCs Seek  CBN Approval Electronic Forex Trading

Bureau de change operators (BDCs) on Wednesday begged the Central Bank of Nigeria to approve the usage of electronic foreign exchange trading to ease demand pressure and facilitate comfort.

Alhaji Aminu Gwadabe, the President of Bureaux De Change Operators of Nigeria (ABCON), made the appeal during a webinar organised by its member with the theme ‘The Impact and Roles of BDCs Challenges and Way Forward.’

Gwadabe urged bureau de change operators to adhere to the rules guiding forex transactions by selling at an appropriate rate stipulated by the CBN.

Gwadabe said: “Technology is a threat whether we like it or not and we have been urging the CBN to allow us operate within the payment space. Our request to the CBN and the federal government is to continue to empower us more especially in the payment space.

“The world is now in the fourth generation and it is no more in the traditional method of doing business even agriculture is digital, so we are appealing to the CBN to allow us be on the digital payment space. As this will deepen the economy, further converge the rate, further deepen liquidity and empower the BDC.

Continuing, Gwadabe said: “Some of us want to be ungodly and trading on parallel market rate is highly unacceptable. The CBN has said it is highly unacceptable, ABCON has said it is highly unacceptable and so we are calling on all the directors of BDCs to please ensure that you don’t sell to willing customers. Any willing customer that says he wants to buy at N465 is not your customer and they would land you sanctions and get penalties.

He added that monies found on operators carrying out illegal trades would be seized by the relevant authorities.

He said: “Any dollar you found trading on the street is going to confiscated and would become federal government’s property. Any dollar you try to courier via border movement at the airport is also government property.”

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Naira to Dollar Exchange Rate in 2020

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Naira to dollar exchange rate in 2020 declined by N73 from N306 Central Bank of Nigeria sold it in the beginning of the year to N379 and N386 on the investors and exporters forex window.

The Naira to dollar exchange rate in 2020 has been marred by a series of economic uncertainties and weak macro fundamentals caused by the COVID-19 pandemic.

At the beginning of the year, the official Central Bank of Nigeria’s naira to dollar exchange rate stood at N306 to a US dollar, while on the parallel market popularly known as the black market, the local currency was exchanged between N350 to N360 per US dollar.

On the investors and exporters’ foreign exchange window instituted by the central bank to mirror a free market, the naira was exchanged at N325 to a United State dollar.

However, unclear economic direction amid a 50 percent increase in Value Added Tax from 5 percent to 7.5 percent and border closure hurt the Nigerian economic outlook and plunged investors’ confidence in the economy even before COVID-19 outbreak.

This weak sentiment metamorphosed into broader economic decline when COVID-19 broke out in the country on February 27 2020 as investors that were doubting President Buhari economic path see no reason to wait any longer or believe Nigeria has what it takes, in terms of the health system, to contain an impending health catastrophe.

The surged in demand for US dollar by those looking to move their funds out of the country compelled Governor Godwin Emefiele led central bank to adjust the Nigerian Naira foreign exchange rate from N306 to a US dollar to N360 in order to discourage capital flight while simultaneously sustain dwindling foreign reserves.

But with global oil prices plunging to as low as $15 per barrel, below Nigeria’s $17 per barrel cost of production and demand for the commodity, especially Nigeria’s crude oil at almost zero during the peak of COVID-19, foreign investors were willing to lose N54 per US dollar to exit the Nigerian market.

According to a JPMorgan report, central bank forex backlog was over $5 billion, yet foreign reserves continues to drop. Left with little to no choice, the federal government approached the International Monetary Fund (IMF) for $3.4 billion financial assistance while the apex bank devalued the Naira again to the currency $379 to a US dollar and N386 on the investors and exporters window.

Despite the negative impacts of COVID-19 on the Nigerian people and the broad-based decline in economic activities that saw the nation’s Gross Domestic Product (GDP) contracting by 6.10 percent in the second quarter of the year and the unemployment rising as high as 27.1 percent or 21.8 million people in an import-dependent economy, the apex bank did not just devalue the Naira twice, the Federal Government raised electricity tariffs and remove subsidy in an economy with very weak consumer spending.

With the series of economic uncertainties, investors in forex forward market in London started offering Naira future contracts for N545, saying the apex bank no longer have the resource to support the Naira given the current global situation.

True to their words, Naira to Dollar exchange rate in 2020 plunged to N480 on the black market amid persistent forex scarcity before recently moderating to N467 when the central bank resumed forex sales to the bureau de change operators across the country.

Also, with the economy expected to plunge into an economic recession for the second time in four years in the third quarter of 2020, the Naira to Dollar exchange rate is expected to suffer even further in 2020.

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Naira Drops N2 on Black Market Even With 11.5% Interest Rate

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Naira Declines on Black Market Despite Lower Interest Rate

Nigerian Naira traded at N467 to a US dollar on the back market on Wednesday despite the Central Bank of Nigeria’s led monetary policy committee lowering the interest rate by 100 basis points after months of saying NO.

The local currency declined by N2 from N465 it exchanged on Tuesday to N467 on Wednesday as investors doubt the new interest rate would be effective given the size of the nation’s economic woes.

Also, the central bank rate adjustment was seen by most as recession validation. Experts and even the apex bank had predicted that except the nation recorded strong growth in the third quarter, Nigeria would slide into recession for the second time in four years.

This was after Nigerian currency was devalued twice to accommodate the nation’s weak foreign reserves in the wake of low oil prices and the drop in demand for the commodity.

Since then, the central bank has injected a total sum of N3.5 trillion into the economy to mitigate the negative impact of COVID-19 on the nation and support gradual improvement in productivity.

However, the decision of the Federal Government to raise electricity tariffs and remove petrol subsidy at a time when 27.1 percent of the working population or 21.8 million people are out of jobs with COVID-19 eroding consumer buying power, further weighed on sentiment and send the wrong message to potential investors and businesses.

Against, the British pounds the Nigerian Naira traded at N600 while it was exchanged at N545 to a European Union common currency.

With labour declaring a nationwide industrial action starting from Monday September 28, Nigeria’s detoriating economic outlook may further plunge the Naira value against global counterparts.

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