Senior Research Analyst at FXTM
This
has been a rollercoaster week defined by volatile stock markets, dollar
weakness, a dovish Federal Reserve and shaky Oil prices.
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Global
confidence remains fragile thanks to coronavirus-related concerns with
lingering fears over slowing global growth and trade tensions fostering a sense
of caution. This sentiment was reflected across equity markets on Thursday, as
stocks suffered their biggest one-day pull-back in three months as traders grew
warier about the number of rising coronavirus cases in several US states.
A
sense of confidence over the world economy recovering quicker than anticipated
initially weakened the Dollar earlier in the week. However, the unwelcome
return of coronavirus related fears may spark risk aversion ultimately boosting
appetite for the world’s reserve currency – something that will pressure
emerging market currencies like the Naira.
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Over
the past few weeks, investors across the globe have been incredibly optimistic
as countries loosened lockdown restrictions and central banks unleashed waves
of stimulus measures against the coronavirus menace.
In
Nigeria, the Central Bank of Nigeria
cut interest rates for the first time since March 2019 while the International Monetary Fund (IMF) approved
$3.4 billion in emergency funding to the country.
While
lower interest rates have the potential to stimulate consumption and the IMF
loan could offer fiscal support, the major issue remains lower Oil prices.
Given how roughly 90% of export earnings and over 70% of government revenues
are sourced from Oil sales, the volatility witnessed in Brent Oil poses a
significant threat to Nigeria’s economic outlook.
Are you aware that many #Nigerian
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What
is even more concerning is the fact that Nigeria will cut its oil supply to
45,000 barrels a day below its OPEC+
quote during Q3 to make up for over-production in May. If Oil prices end up
depreciating due to coronavirus related fears, Nigeria’s export earnings and
government revenues may drop considerably during the third quarter of 2020.
Such an unfavourable development could hit the Naira, punish local stocks,
trigger inflationary pressures and ultimately sabotage economic growth.
On the
bright side, the Naira maintained
stability against the Dollar at the
parallel markets this week. The Naira traded around N450 to $1 despite the shaky sentiment, questions over world growth
and coronavirus fears.
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