Sentiment towards the Nigerian economy displayed signs of improvement in June following the Central Bank of Nigeria’s decision to de-peg the Naira against the Dollar in an effort to promote economic stability. Like other oil export dependent nations, Nigeria has been entangled in a fierce battle with falling oil prices while diminishing government revenues have eroded foreign reserves. The renewed militancy in the south continues to see the nation’s oil production decline from 2.2M to 1.5M barrels a day which simply exacerbated the pain of falling oil prices, consequently placing Nigeria under further pressure. With concerns elevated over a potential technical recession in Q2, the CBN may have taken the right steps to de-peg before the turmoil spiraled out of control. Although there are concerns that the Naira may decline as the natural forces of supply and demand create an equilibrium price level, the weakening Naira could be the first steps to attracting foreign investors which may bolster GDP growth. Nigeria’s stock market have followed a positive path and could be set for further inclines as renewed risk appetite from the improved sentiment encourages investors to trade riskier assets.
The recent Brexit developments have dealt a blow to global sentiment with a wave of risk aversion punishing global stocks. With the Brexit victory becoming a reality, concerns may heighten over the impacts it may have on the UK and global economy which should create a sense of unease. It should be kept in mind that because Nigeria is a member of the British Commonwealth, the impacts of a Brexit could indirectly have an effect on the Nigerian economy. If a Brexit causes an economic slowdown in the United Kingdom then this may trickle back to Nigeria as a form of decreased investments by the UK to the Nigerian economy. A decrease in external investments in Nigeria may affect domestic GDP growth and potentially enforce further pressures on the nation that is currently embattling faltering oil prices. With the Brexit uncertainty becoming a key theme in the markets, the Sterling could be left vulnerable to more losses as investor attraction becomes haunted towards the currency. The Sterling has weakened against the Naira and further pound weakness could send the GBP/NGN towards 370 on the official markets exchange.
While it is known that the Dollar is not the legal tender in Nigeria, it has a major impact on the economy as most goods are imported in Dollars. An appreciating Dollar coupled with depressed oil prices has already punished the Naira with the citizens feeling the pinch. Although the value of the Dollar surged higher following the Brexit victory that encouraged investors to flock to safety such as the Dollar, prices could still be set to decline in the future. With expectations diminishing over the Federal Reserve raising US rates in Q2, the Dollar could be left vulnerable to further losses moving forward. A weaker Dollar may have a positive impact on the Nigerian economy while potentially boosting the value of the Naira on the free floating market exchange. From a technical standpoint, the Brexit jitters have turned the Dollar Index bullish on the daily timeframe and a weekly close above 96.00 may open a path towards 97.00.
WTI Crude Oil experienced a sharp decline last week and may be poised to trade lower as a horrible cocktail of Dollar strength and renewed concerns over a potential decline in global demand encourages bearish investors to pounce. Falling oil prices have been one of the attributes that continue to punish the Nigerian economy and with low oil prices here to stay, the right decision may have been taken to diversify away from being heavily oil export reliant. For an extended period, the oversupply fears have haunted investor attraction towards Oil while the fading expectations towards OPEC securing any production freeze deal continue to limit the upside gains. From a technical standpoint, WTI may be destined to trade towards $45 if bears could secure a solid weekly close below $48.
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Written by Lukman Otunuga, Research Analyst at FXTM
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