The dollar and the yen rose higher on Thursday. This was as a result of the possibilities of a rise in COVID-19 cases and a second wave of the pandemic prompting increased demand for the currencies.
The British pound also traded in a narrow range ahead of a Bank of England meeting in which policymakers are expected to stretch out quantitative easing especially given the state of the economy as well as volatile trade negotiations with the European Union.
Junichi Ishikawa, a senior foreign-exchange strategist at IG Securities in Tokyo explained that the “Upside for U.S. stocks and other risk assets has dwindled because more people are talking about the second wave of virus infections. This supports the dollar and the yen because they are both safe to havens. The pound has its own problems. The British economy is not in good shape and a hard Brexit remains a risk.”
The dollar traded at $1.1234 per euro on Thursday in Asia following a 0.2% gain in the previous session. The yen also increased to 106.79 against the dollar, while the Sterling went down to $1.2533 for its third day of losses.
The cases have also risen in many states within the U.S. as well as the underlying travel restrictions. The situation being witnessed in both the US and China has made people especially concerned about the dangers of reopening the economy or easing restrictions too fast before a vaccine is found.
Britain, on the other hand, is seeking a free trade agreement with the EU, which it left earlier this year in January. The challenge is that owing to the little progress that had been made, there are worries that both will not reach an agreement before the end of 2020.
U.S dollar pull back some gains, investors’ appetite for risk strengthens
Global investors and currency traders are predicting futuristic gains for the greenback.
The U.S dollar pulled back some of its gains recorded previously on Thursday morning as global investors retreated from the safe-haven currency.
The U.S. Dollar Index that monitors the American dollar against a group of other major currencies lost 0.11% to 97.040 at 5.49 am Nigerian time with an appetite for risk increases, as Global stocks continued to rally leading currency traders and investors retreating from the U.S dollar
Quick fact; The U.S. Dollar Index that tracks the American dollar against a basket of other major currencies (like the Japanese yen, British pound sterling, Swedish Krona, Euro), Individuals hoping to meet foreign exchange payment obligations, via dollar transactions to countries like Europe, and Japan, would need to pay more dollars to fulfill such transactions.
Stephen Innes, Chief Global Market Strategist at AxiCorp in a note to Nairametrics, wrote about the present market volatility in the currency market. He said;
“If you are handling the currency hot seat these days, you likely feel tethered to the end of a very reactive Yo-Yo string as currency moves in one session are faded in the next.
“Currencies have started the second half of the year, where they left off in the first and outside of the “risk-on risk-off” see-saw currency appetite struggled to find any meaningful catalysts.
“With G-10 central banks at zero or below, in the absence of any significant monetary policy transmission that leaves currency traders chasing or instead guessing which countries activity data will outperform the others, which is getting enveloped around the dichotomy between current buoyant conditions and subdued future expectations striking both in consumer sentiment and in financial-market indicators.”
However, some global investors and currency traders are predicting futuristic gains for the greenback with the resurgence of the COVID-19 cases globally. There were over 10.6 million cases as of July 2, according to Johns Hopkins University data.
“If we see further spikes in coronavirus cases, I would expect both the dollar and the yen to strengthen against other currencies,” Tohru Sasaki, head of Japan market research at J.P. Morgan, told Reuters.
Naira crashes to an all-time low at the black market as liquidity crisis worsens
The volatility and uncertainty of the forex market seem to persist due to liquidity shortages across markets.
Forex turnover at the Investor and Exporters (I&E) window continued with its downward slide on Wednesday, July 1, 2020, as it dropped by 28% day on day. This is according to data from the FMDQOTC, an exchange where forex is traded by foreign investors and exporters.
According to the data tracked by Nairametrics, forex turnover fell from $14.37 million on Tuesday, June 30, 2020, to as low as $10.37 million on Wednesday, July 1, 2020, representing a 28% drop on a day-to-day basis. This is a second consecutive day of decline this week and also the lowest turnover recorded in the I&E window since last week.
This further reinforces the volatile and uncertain nature of the foreign exchange market with trading volumes apparently irregular and piling pressure on the exchange rate at the NAFEX market and by extension the parallel market.
The volatility and uncertainty of the forex market seem to persist due to liquidity shortages across markets. Liquidity remains quite tight in the foreign exchange market, with the average turnover in the I&E market significantly down to about $45.5 million in the month of May compared to $297.5 million that was recorded in January.
As we have so often reported, accumulated demand for forex in the market is thought to range between $1.5 and $5 billion depending on which analyst you are speaking to. Forex shortages have persisted since the crash in oil prices coincided with the global lockdown due to COVID-19. The rise in demand and contrasting drop in supply has called for another round of devaluation, which the CBN has insisted it has plans to implement. A devaluation last occurred in March. The activities of the speculators seem to have continued unabated.
Speculators have thus patronized the parallel market, otherwise known as the black market, thereby widening the gap between it and the I&E window. The CBN maintains that the perceived demand cannot be substantiated as the lockdown induced by the COVID-19 pandemic suggest demand should be low due to travel restrictions and drop-in economic activities.
The further decline in liquidity could further fuel speculations in the black market where the exchange rate has traded at a premium of N60+ over the last few weeks. The CBN claims most of the demand being cited is not represented by any official documentation and that it has informed foreign investors with genuine forex demand to be “patient” and that they will get their forex.
In related news, the exchange rate at the I&E remained stable on Wednesday, closing at N386.50 to a dollar, which was the same rate that was recorded on Tuesday, June 30. The opening indicative rate was N387.08 to a dollar on Wednesday. This represents a loss of 2 kobo when compared to the N387.10 opening rate recorded on Tuesday.
At the black market where forex is traded unofficially, the naira depreciated further by N2 to a dollar to close at an all time low of N462 to a dollar on Wednesday, as against the N460 to a dollar on Tuesday, the lowest in almost a year. The exchange rate at the beginning of the week was N460 to a dollar. By crossing N460, the exchange rate has broken a psychological ceiling going past N460 for the first time ever.
Nigeria continues to maintain multiple exchange rates comprising the CBN official rate, the BDC rates, and the NAFEX (I&E window). Nairametrics reported last week that the government is mulling unifying the multiple exchange rates in a bid to increase the amount available for state governments to share.
The depreciation of the Naira in the black market can be attributed to the shortage of dollar supply which is outweighed by demand as that puts further pressure on the forex market. The negative impact of the coronavirus pandemic on global oil prices has constrained the CBN’s capacity to intervene satisfactorily in the foreign exchange market as dollar inflow has slumped.
The forex scarcity and drop in revenue puts pressure on the value on the naira despite CBN’s effort to maintain stability across the forex segments. The CBN is expected to continue with its intervention in the foreign exchange market to ensure market stability.
Digitization of the U.S Dollar faces U.S Senate hearing
Member of the Financial Services Committee asked to know what digital dollars had to do with financial inclusion.
The world’s most powerful economy was in the spotlight yesterday, as America’s Senate Banking Committee deliberated on the digital dollar project before a selected audience, and offered solutions on how to upgrade the country’s financial infrastructure.
The U.S banking committee sought counsel from Paxos CEO, Charles Cascarilla, a financial researcher and professor at Duke Nakita Cuttino, and former CFTC Chair, Chris Giancarlo, as witnesses.
Charles Cascarilla explained in detail how stablecoins operate and their advantages in modern finance. In his words, “Stablecoins address the antiquated plumbing of our financial system.”
“We need to address the frictions that exist with the payments system now,” Cuttino said. “Of course with innovation there comes the reduced cost.” Given the focus of her research, Cuttino provided the greatest insight on the specific concerns of the unbanked:
“Any solution should have low transaction costs. In the early days for Bitcoins, the transaction cost was extremely high — and remains extremely high.”
Top member of the Financial Services Committee, Patrick McHenry, asked Giancarlo to explain what digital dollars had to do with financial inclusion, to which Giancarlo responded: “It’s about on-ramps into the financial system and making them as simple and accessible as possible.”
Giancarlo’s current champion of the Digital Dollar Project spoke more about the project. He said:
“We began this journey nine months ago, long before COVID was even a concern, long before the insufficiencies of a lot of our payment systems were as broadly noted and acknowledged as they are now. We have said from the beginning and will continue to say, something as important as upgrading the U.S. dollar needs to be done thoughtfully, deliberately.
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“But we need to start now. And if COVID response is the catalyst to starting now, if China’s BSN is the reason to start now, if the Riksbank of Sweden is the reason to start now, if Bitcoin is the reason to start now — all of those pretexts are fine and all of them may appeal to a different constituency, but they say the same thing and that is we’ve got to get started. But we can’t rush it.”