Gross domestic product in
Africa’s largest economy rose 1.93% last year, compared to the tepid 0.8% in
2017. With fourth quarter economic growth also printing stronger than expected
at 2.38% in real terms YoY, Nigeria seems to be gaining economic momentum.
However, with the nation’s fortunes still closely linked to Oil markets, growth
could be threatened this year if Oil prices continue to depreciate.
It will be a monumental week for
the Nigerian markets as presidential elections loom. Although the Naira was
stable against the Dollar yesterday at N358 in the parallel markets, there
could be some volatility this week due to election uncertainty.
USD rally takes investors by surprise; but will the
winning streak be able to continue?
A key overhang for the Dollar may
be clearing up after US lawmakers announced they have a deal in principle to
avoid another US government shutdown this weekend. However, President Trump’s
approval is still required before the spending bill can go through.
At the time of writing, the DXY
is holding marginally close to 97, having posted gains over the last eight
consecutive days – its longest winning streak since 2016. This recent run of
form certainly goes against initial expectations for muted Dollar strength this
year given the Federal Reserve’s recent U-turn on US monetary policy.
There is likelihood that central
bank policy in the form of the Federal Reserve is not the catalyst behind the
USD rally. It probably doesn’t have anything to do with the U-turn from the Fed
a few weeks ago either. Investors are possibly thinking that “no news” when it
comes to the ongoing US-China trade talks is not necessarily an example of “no
news is good news” for this environment of trade tensions. The threat can’t be
understated that the United States will pull the trigger on extra trade tariffs
on Chinese goods at the beginning of March. We saw throughout the second half
of 2018 that market anxiety over trade tensions pushed the Dollar higher
against its global counterparts, and it wouldn’t be that much of a surprise if
recent history repeats itself – if there is another escalation in the trade
tariff world.
According to the Bloomberg
terminal, spot returns for G10 currencies against the stronger Dollar since
January 30 have experienced a clear sea of red in favour of the USD. This is
following the euphoria that was created when Fed Chair Jerome Powell signalled
the need for “patience” when it comes to the potential of hiking interest rates
in the United States.
What else is driving the Dollar train higher?
Another perspective on what could
potentially be driving the USD higher is the lure towards the Greenback being
amplified by ongoing praises for the US economy. At the same time, it has
become a strain to market headlines that counterparts to the United States throughout
a range of developed and emerging markets are highlighting downside risks to
their respective economies.
Those who are fatigued from yo-yo
trade headlines in the market might be inclined instead to align their mindset
to the return of economic and central bank divergence between the United
States, and pretty much everywhere else. This ultimately supports the prospects
of a stronger Dollar.
What data to look out for next and what could this mean
to interest rate policy?
Markets will look to this week’s
US January CPI reading as the next test of the Fed’s data dependence. Following
that, attention will turn to next week’s release of the FOMC January 30 meeting
minutes for potentially further clues on what could have encouraged the Fed’s
recent pivot.
The current stance on US interest
rate policy is expected to, in turn, allow other central banks to take a pause
on tightening monetary policy. With central banks worldwide either standing pat
or moving towards another round of a potential easing bias, investors may have
less impetus to part with their current darling, the Dollar.
The dovish outlook on global
monetary policy, coupled with further positive indicators of US economic
strength, should support the Dollar’s attractiveness and this could mean DXY
returning to its recent high of 97.54 achieved in November 2018.
Remember a positive conclusion to trade talks would be
seen as Dollar-negative
However, this isn’t to say that
demand for the Greenback will continue unabated in the near term. Traders
should not be looking at the USD as one-way traffic going higher up the charts
by any means.
While the US government shutdown
may have been averted, markets also have to contend with this week’s crucial
talks in Beijing surrounding US-China trade tensions. Both countries are
nearing the end of the 90-day truce and in the event that President Trump
pushes through with hiking tariffs on Chinese goods come March 2, that will be
seen as a potential trigger to give the US dollar another leg up.
Although given the political and
economic pressures that are at risk of creating headwinds to the world’s two
largest economies, markets are holding out hope that a deal would be struck
sooner rather than later. This would be viewed in the market as a potentially
Dollar-negative outcome.
Should key deals be approved in
Washington (to fund the US government) and in Beijing (to avert a tariff hike),
these will be viewed as the catalysts for risk-on sentiment to return to the
fore. Meaning that this would be a significant driver behind potentially higher
global equity markets, improved demand for emerging markets and commodities
like Oil.
It would however be seen as a
risk to the relentless Dollar rally that has taken place over February.
Where do Emerging Markets stand in the currency
environment?
Yet amidst this winning streak
against G10 currencies, the US dollar has seen mixed results against
emerging-market currencies during the same period.
Some of these EM currencies that
posted gains against the Greenback are coming back from oversold positions last
year, and are supported by factors such as resilient domestic economic
fundamentals, foreign fund inflows, and rebounding commodity prices.
However, EM currencies are still
exposed to major events that can sway global risk sentiment, such as US-China
trade tensions, Brexit uncertainties, and slowing global growth. China’s
moderating economic conditions remain a major overhang for the global growth
narrative, and the slowdown may be felt in many emerging economies via the
trade and FX channels.
Ultimately, EM currencies will
likely be dictated primarily by the broader US dollar theme, and whether the
Greenback can build on its one percent climb so far in 2019.
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