Sunday, 21 July 2019

WILL THE CENTRAL BANK OF NIGERIA JOIN THE MONETARY EASING BANDWAGON?

Lukman Otunuga,
FXTM Research Analyst

Unfavorable macroeconomic conditions across the globe have forced major central banks to embark on a monetary easing cycle to protect their respective economies.

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The Federal Reserve is expected to cut interest rates for the first time in over 10 years later this month, while central banks in Asia and Africa including the South African Central Bank have already made a move. With economic conditions in Nigeria slowly stabilizing and inflationary pressures slowly moderating towards single digits, the CBN has the opportunity to join the monetary easing bandwagon.

Lower interest rates in Nigeria will stimulate consumption, encourage businesses to increase investment spending and give banks more incentive to borrow to corporations and households. Given how household consumption is roughly 80% of GDP, a rate cut will be supportive of growth potential as the nation diversifies away from Oil reliance.

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Dollar humbled by IMF and Fed doves
It has been another rough and rocky trading week for the Dollar thanks to the International Monetary Fund (IMF) and dovish commentary by Fed officials. Earlier in the week, the IMF said the US Dollar was overvalued by 6%-12% - ultimately forcing investors to re-evaluate the Dollar’s current valuation.

On Thursday, Federal Reserve Bank of New York President, John Williams, said that central banks must “take swift action when faced with adverse economic conditions”. Also, Federal Reserve Vice Chairman, Richard Clarida, said yesterday that policymakers “don’t need to wait until things get so bad” before cutting interest rates.

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Such commentary from Fed officials is reinforcing expectations of a US interest rate cut at the end of this month. The Dollar Index (DXY) remains under pressure on the daily charts with prices trading marginally below 97.00 as of writing. Repeated weakness below 97.00 could open a path lower towards 96.60.

Commodity spotlight – WTI Oil
WTI Crude tumbled roughly six percent this week as US inventories jumped by over nine million barrels last week, which sparked fears over global demand for crude lagging behind rising output.

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The slowdown in global growth has overshadowed market sentiment for Oil, as rising geopolitical tensions have failed to live up to their potential of sending prices higher. Any further deterioration in the global demand outlook could mean nothing but more pain for oil markets. On the bright side, markets can take some comfort in the OPEC+ decision to extend its supply cuts through March 2020, which should help support Oil prices over the coming months.

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