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Currencies

U.S dollar gains against major currencies, U.S Fed warning limits upside

The U.S. Dollar Index tracks the American dollar against a basket of other major currencies.

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parallel market, greenback, U.S dollar rises against major currencies, U.S and China’s economic data support the dollar, U.S dollar gains ground, U.S. President Trump boosts investors’ Optimism, Exchange rate stabilizes across forex markets as CBN moves against abuse by dealers

The American dollar gained on Wednesday at London’s trading session, with global investors and currency traders turning to the safe-haven asset amid a resurgence of COVID-19 caseloads.

The American Dollar Index, which monitors the U.S dollar against a basket of other currencies, gained 0.06% to 96.907 at 5.33 am local time.

However, many currency traders’ positive bias on the greenback further weakened over a warning from several U.S. Federal Reserve officials that the rising number of COVID-19 caseloads could distort the fragile economic recovery, with some global central banks stimulus programs due to expire soon.

READ MORE: Novavax secures $1.6 billion funding for COVID-19 vaccine production

“The mood changes day by day, but the dollar looks to be supported for now as investors turn more cautious about the virus,” Yukio Ishizuki, foreign exchange strategist at Daiwa Securities, told Reuters.

Quick fact: The U.S. Dollar Index 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 less dollars in meeting such obligations.

READ MORE: Gold price rises further due to influx of new COVID-19 cases

“The Fed’s comments on the economy sound sombre. There’s reason to worry because it is hard to see when the virus will be brought under control,” Yukio added.

Stephen Innes, Chief Global Market Strategist at AxiCorp, in a note to Nairametrics, spoke about the fundamentals triggering the U.S index volatility. He said:

“The USD is stronger this morning, aided by risk aversion and perhaps the continued run of surprisingly strong US data.

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“However, the US data’s comfort blanket is being throttled by the rising COVID-19 case count in many US states that might point to renewed economic headwinds ahead.”

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Olumide Adesina is a France-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment trading. Follow Olumide on Twitter @tokunboadesina. He is a Member of the Chartered Financial Analyst Society.

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Currencies

Why external reserves is falling despite a rise in oil prices

Increased oil prices seem not to have stopped the further slide in Nigeria’s foreign reserves.

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Emefiele’s reappointment

Nigeria’s external reserve declined from $36.3 billion as of January 29, 2021, to $34.998 billion as of March 1, 2021, losing about $1.4 billion in just a month.

The rapid drop in the country’s external reserve is occurring despite the increase of Brent crude to over $66 per barrel as of February 24, 2021, from about $51 per barrel that it closed with on January 4, 2021.

Some analysts had attributed a couple of likely reasons for this drop. This includes the CBN intervention in the forex market to stabilize the exchange rate, low foreign inflows into the country, some CBN forex policies which discourage foreign investors.

The President of the Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadebe, during his chat with Nairametrics, said that the decline in Nigeria’s external reserve despite the recent increase in oil prices was due to supply shocks and shortages of foreign exchange due to drop of forex inflow from various sources.

Gwadebe said, ‘’You know we have a lot of supply shocks and shortages even before the appreciation of the crude oil prices, we just came out of recession with less than even 0.1%. We know the prices of crude oil, the demand came down throughout the Covid-19 period, even now with the new variant. So the IMTOs inflow has reduced drastically, export proceeds have reduced drastically, the I & E window has also gone down drastically. You know you can appreciate what is happening at the I & E window, their trade transactions sometimes hover up to N420/$1.’’

Read Also: CBN Governor confirms exchange rate unification plans  

On why increased oil prices have not stopped the further slide in the reserves, the ABCON President said, ‘’Completely all the sources coming have dried up, the oil prices dried up, IMTO window dried up. We are talking about a month, and these are contracts that have been closed for 3, 6 months delivery, we are just witnessing it. It will take time, it’s a very good buffer, no doubt we rely on it heavily for 90% of our foreign exchange supply. So if we have that improvement, it will give the CBN the muscle, the wherewithal to continue to support the local market. It will give CBN the muscle to make any speculation, check any hoarding.”

‘’Now that we have prospects in oil prices definitely that news, that coming in of new inflows will give the CBN the muscle to make any speculation, to checkmate hoarding, because they are in I & E window, they are in BDC window, they are in a lot of windows, so they can come up with liquidity. Definitely, it is going to. And we have seen the impact because the way it was going before this increase in crude oil prices, it was worrisome and if you look at it now it has remained stable, the highest it went is N480 for the parallel market and its always trending down. There is that stability just for that news, so you can imagine when we start receiving the liquid grill just imagine what it will become just like people have predicted and analyzed N430, N450/$1 is what we might be looking at by the end of the year,’’ he added.

On his part, a treasury and financial analyst, Odinaka Nwokonkwo, while giving reasons why it should be that way, pointed to CBN obligations. He said the apex bank paid Eurobond maturities in January or thereabout, and did FX swap with local and international counterparts which may have matured and needed to be paid down.

He said, ‘’There is a Eurobond maturity that CBN funded for, so that would also reduce the reserves, then another thing is when you look at, CBN has been intervening in the forex market. So on that space, you are seeing retail, you are seeing SME and invisibles intervention weekly. Retail is biweekly and SME and invisible about $100 million weekly. So sometimes CBN has bilateral transactions with international institutions and local banks where they take their FX and basically give them treasury bills, so that also is part of the reserves.

Read Also: Oil prices break above $65 a barrel, passing 13-month high

‘’So if some of those swaps have matured and CBN needs to pay down these bonds, they will also see a reduction. So it’s a combination of a lot of things. And also what is the volume of sales of the oil, are we really selling more, is the quantity we are selling is the same as what we are selling before. The demand might drop a little bit because some countries also have a second lockdown.’’

Nwokonkwo also believes that in the next quarter, there might see an accretion because some of those obligations may not be there.

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While pointing out that the accretion rate is slower than the debit rate, he said the oil price at $65 is not a significant increase compared to CBN FX obligations.

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These external reserve figures and swings point to two things: Nigeria seems to be overestimating the power of it oil to keep the country running and the enduring reality it needs to find other ways of earning foreign exchange.

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Currencies

Bloomberg report on OMO is “fabricated” – CBN Official 

Officials at the APEX Bank are denying reports that they plan to unwind OMO Sales.

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Sources in the central bank have denied a recent Bloomberg report that the CBN will be unwinding its Open Market Operations programme which has targeted foreign investor inflows for the last three years. 

According to a Bloomberg article, the central bank was “preparing an end to an era of debt sales in reference to OMO bills which are highly lucrative risk-free securities loved by foreign investors due to their relatively high yields.  

The report cited comments from CBN director of monetary policy, Hassan Mahmud who they claimed said: “offerings to non-residents of so-called Open Market Operations bills — introduced to help stabilize the naira following the oil-price collapse in 2015 — are to be phased out once current obligations have been redeemed.” 

However, a senior source within the central bank denied this claim reiterating that there are no plans to unwind the sale of OMO bills to foreign investors. The source who preferred anonymity as the bank was yet to comment officially claimed it was “fabricated” and not true.  

Why this matters

The central bank has relied on Open Market Operations as a means of attracting Foreign Investor dollars into the country. The dollars are also used as a liquidity buffer for the country’s falling external reserve and a major factor in stabilizing the exchange rate between 2016 and 2019.

  • To achieve this purpose, OMO bills were priced at attractive yields (as high as 18% per annum at some point) and were a major source of earnings for yield-hungry foreign investors. The CBN also provided them with near guarantees on their foreign exchange hedging it via FX Swaps.
  • However, in 2019, the CBN yanked off local and institutional investors from accessing OMO market leaving foreign investors and banks as the only buyers of the bills.
  • A recent Chapel Hill report read by Nairametrics suggests OMO bills held by foreign investors topped $11 billion as of June 2020.
  • The report also claims CBN OMO sales dropped by 70% to a 5-year low of N6.5 trillion in 2020.

 

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