Monday 17 June 2019

INFLATION, FED AND OIL IN FOCUS

drums of oil
Lukman Otunuga,
FXTM Research Analyst

It will be another relatively light week for the Nigerian economy with the only Tier One economic report already released this afternoon. However, external drivers in the form of weak Oil prices, Federal Reserve policy meeting and ongoing trade tensions could spice up the mood at home.

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The latest inflation figures from Nigeria may fuel concerns over inflationary pressures creeping back into the economy. Consumer prices rose slightly to 11.40% in May from the 11.37% in the prior month amid rising food prices. Seasonal factors and recent implementation of the minimum wage may have also played a role in rising inflation. Should consumer prices continue to accelerate in the coming months, this could force the CBN of Nigeria to maintain status quo on interest rate.

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While the timing of a rate cut remains uncertain, there is still a possibility of the CBN surprising markets near the end of 2019 if domestic conditions stabilize, inflation is able to moderate back towards the 6%-9% target and the Fed cuts interest rates.

Fed meeting the key focus in the week ahead
All eyes will be on the Federal Reserve’s policy announcement on Wednesday, where any hint of waning patience from policymakers could undermine the Greenback’s recent gains. It remains to be seen which part of the economic equation will hold most of the Fed’s attention – confidence that the US economy’s record-breaking expansion has more room to run, or the growing downside risks stemming from President Donald Trump’s trade conflicts with global economies. Should markets detect the Fed’s bias towards an “insurance” rate cut, the DXY could retrace towards its 100-day moving average of 97.0, with stronger support potentially coming at its 200-day moving average of 96.59.

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Is Oil becoming desensitized to geopolitical risks?
One would have expected Brent Crude to shoot higher as geopolitical tensions in the Middle East trigger concerns over potential supply risks making a return.

However, Brent Crude is wobbling above $62 at time of writing, even as OPEC continues to stoke market confidence that the ongoing supply cuts will be extended through 2019. It is becoming clear that investors are overlooking geopolitics to focus on demand side factors in the form of slowing global growth and persistent trade tensions. With the International Energy Agency’s forecasting that supply will outgrow demand in 2020, the path of least resistance for oil points south, even as OPEC+ producers attempt to rebalance markets in an effort to limit downside shocks.

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Falling Oil prices will hit many energy export dependent nations including Nigeria. Should WTI & Brent Crude remain in a bear market, this will eat into Nigeria’s government revenues, threaten foreign exchange stability and most importantly economic growth.

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