Currencies
Why currency traders are now buying U.S dollars
Many currency traders believe that the U.S dollar index is showing an oversold signal.
Currency traders were relatively bullish in trading the US dollar at London’s trading session on Thursday.
The US dollar index that is used to track the U.S dollar against major global currency peers, was up 0.11% to trade at 92.933 earlier on Thursday.
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Why currency traders are going bullish on the dollar now
In spite of the world’s largest economy having a surge in COVID-19 caseloads, many currency traders believe that the U.S dollar index is showing an oversold signal, meaning that any time the value of the safe-haven currency drops below the 92.250 support level, traders increase their long positions.
Also, it should be noted that the United States in recent weeks, has been printing impressive economic data; this crucial macro tells forex traders that the worst of the COVID-19 onslaught is definitely over.
However, traders are waiting in the long term for the U.S election scheduled to hold in November for a clearer view on the safe currency horizon.
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That said, if President Trump wins this crucial election, it is believed, a stronger dollar will come to play. This is coming on the basis that the recent dollar weakness is really a vote of confidence on the US, particularly on the success of President Trump as he had been able to keep the U.S index value above 97.5 relatively, until the onset of COVID-19 pandemic.
US Dollar currency index
Quick fact: The U.S. Dollar Index tracks the American dollar against other major currencies such as the Japanese Yen, British Pound Sterling, Swedish Krona, the Euro, and more. Individuals hoping to meet foreign exchange payment obligations, via dollar transactions to European countries, and Japan, would need fewer dollars in meeting such obligations.
Stephen Innes, Chief Global Market Strategist at AxiCorp, in an explanatory note to Nairametrics, gave vital insights on the EUR/USD pair.
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“A decisive shift in the narrative in the Euro is unfolding, and the price action might not entirely be caught up to the new storyline just yet.
“The EURUSD is still grinding up the channel, but the narrative is less bullish than after the significant bull target of 1.2000 was soundly rejected.
“I guess that EURUSD grinds lower into the ECB meeting as the market reduces significant length into what is becoming an obvious event risk. The attraction of a dovish Fed on September 16 might not be strong enough to offset the ECB’s downside risks on September 10.
“As far as the US Fed is concerned, I do not think they were anywhere near as dovish as the market read. September easing looks possible but not likely, suggesting the Fed’s sense of urgency feels lower than it did a few weeks ago as both housing and manufacturing are booming.”
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However, in the short term, currency traders remain in a holding pattern ahead of Friday’s Non-Farm Payroll (NFP).
Currencies
Naira gains at NAFEX window as oil prices rally back
The exchange rate between the naira and the US Dollar closed at N411/$1, at the Investors and Exporters window on Wednesday.
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.
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.’’
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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.
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‘’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.
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.
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.
