Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Plunge of Nigerian Naira and the New US Dollar Volatility

Currencies / Africa Dec 07, 2016 - 04:17 PM GMT

By: Dan_Steinbock

Currencies While OPEC production cuts could slow the plunge of Nigerian naira, the real headwinds are ahead, thanks to the impending Fed rate hike, the incoming Trump administration and US dollar as the new fear index.

In Africa, some 14 countries have been using the CFA franc that is pegged to the euro, while three have been pegged to the South African rand. Before the Trump triumph, the conventional wisdom was that as the US dollar would weaken against the euro in the short term, this will reduce inflationary pressures in these countries. However, skeptics argued that inflationary pressures were already low in most countries with a euro peg and a stronger currency would affect their competitiveness.


The post-US election conventional wisdom deems that a Trump presidency may strengthen the so-called ‘safe-haven currencies,’ including the euro and the yen, in the short term, whereas emerging market currencies will come under pressure. That, in turn, would mean raising inflationary pressures while boosting competitiveness in those countries that have more liberalized exchange-rate systems.

Yet, the realities are more complex and less promising.

African currency turmoil

In South Africa, political turbulence and international pressures have been reflected in the whip-sawing of its currency. In the past, rand exemplified the hopes associated with the BRICs economies. Today, it has been hit almost as hard as Mexican peso in the aftermath of the Trump triumph.

While fairly stable this year, Ghana’s cedi has been struggling the past few weeks, surging to 4.20 to US dollar compared to 4.04 only a while back. Kenyan shilling is expected to weaken, due to rising dollar demand from importers. In Uganda, the shilling has been hit by weak foreign demand.

Ever since 2009 and the global crisis, Zimbadwe has used the US dollar to replace its own failed dollar, along with rand, the euro and the Chinese renminbi. Only days ago, Zimbadwe rolled out a ‘bond notes’ currency, kind of surrogate dollars, to avoid a cash crunch, despite warnings that it could cause hyperinflation and undermine the rule of the 92-year old Robert Mugabe.

Like Nigeria, Angola, another major African oil exporter, has pegged its currency with the US dollar. As its budget deficit is likely to climb to 5% during the next five years, the national currency kwanza will lose value against the US dollar. In the official market, kwanza has almost doubled in the past four years to almost 166 to US dollar. Thanks to low oil prices, the difficulties to obtain the US currency are increasing, while the disparity with the exchange rate on the black market is likely to remain high.

The plunge of naira

Nigeria is in no way immune to foreign-exchange headwinds. After the summer devaluation of the official rate, the naira fell from about N200 to $1 to almost N300. Although official rate remains around N315, the black market rate has climbed from N350 in mid-summer to N480.

Typically, the plunge is explained by the eclipse of the commodity super-cycle, particularly the fall of oil prices ever since spring 2014. As long as Nigeria is inadequately diversified and dependent on oil revenues, which account over 90% of export revenues, any decline in dollar-denominated oil prices means the fall of naira.

An emerging economy needs foreign exchange to finance investment and growth. Consequently, the willingness to import at the expense of exports and preference for foreign products, has amplified the challenges. Furthermore, with the abuse of public funds, collective assets morph into dollars, which are then parked in private foreign dollar accounts, which compounds naira’s depreciation. Finally, the confidence of foreign investors, which began to fall in the Jonathan era, has continued to deepen.

Recently, the Organization of Petroleum Exporting Countries (OPEC) agreed to reduce oil production by around 1.2 million barrels per day, starting in January 2017. In Nigeria, the production is up to 1.9 million barrels and could rise to 2.2 million. As a result of the proposed cuts, oil prices are expected to climb from $50 to $60, which has a potential to alleviate Nigeria’s malaise to a degree. As Nigeria along with Libya were exempted from the OPEC cut, observers hope that this gives time to resolve the Niger-Delta crises.

However, the hopes associated with the production cuts must go hand in hand with the anticipated US Federal Reserve rate increase in December and President-elect Trump's expressed desire to toughen American trade and currency policies.

Rising US dollar, rising global risks

In Africa, foreign-exchange volatility has escalated since the embrace of ultra-low rates and quantitative easing by central banks in major advanced economies in  2009-10. With the Fed rate hike, turmoil is about to enter a new stage.

Along with other emerging market currencies, the naira must cope with the US dollar, which recently hit a 14-year high, driven by rising US bond yields, expectations of a Trump fiscal stimulus and the impending Fed rate hike. In the process, Asian currencies suffered a sell-off and so did many currencies in the Americas and emerging markets overall. African currencies, including Nigerian naira, must also cope with US dollar’s growing risk in the world economy.

Before the 2008-9 financial crisis, there was still a close correlation between leverage and the volatility index (VIX). When the VIX was low, the appetite for borrowing went up, and vice versa. That correlation no longer prevails, due to years of ultra-low rates and rounds of quantitative easing by advanced economies central banks.

Recently, the Bank for International Settlements (BIS) reported that the US dollar has replaced the volatility index as the new fear index. As the VIX’s predictive power has diminished, US dollar has become the indicator of risk appetite and leverage. This dynamic has distressing implications because it has pushed international borrowers and investors toward the dollar.

Yet, US fundamentals are eroding, as President-elect Trump himself has acknowledged. US sovereign debt has soared to $20 trillion, while in the past year foreign central banks sold almost $375 billion in Treasuries. In these conditions, the Fed rate hikes could boost the US dollar as a kind of a global Fed funds rate, which would result in dollar tightening and deflationary constraints. That, in turn, could impair emerging economies that today fuel the global growth prospects.

Such a scenario has potential to unleash a chorus of criticism of the current dollar-based system, particularly in the BRICs economies. Like the economist Keynes in the 1940s, they argue that the fundamentals of the US economy do not support US market valuations and US dollar – not to speak of international markets and currencies.

What’s good for the US dollar is no longer that good for the world economy.

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

© 2016 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in