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CBN Keeps Rates Unchanged, Dollar In Focus

In a widely anticipated move, Nigeria’s central bank left its benchmark interest rates unchanged in November.

All 10 members of the monetary policy committee voted to keep the rate at 11.5% to support economic growth. Given how Nigeria remains on a fragile road to economic recovery, a rate hike would have done more damage than good. In regards to growth, the central bank saw GDP averaging 3.1% this year compared to the 2.86% in September. With inflation slowing to a 10-month low of 16%, the CBN has more breathing room to keep monetary policy unchanged until economic conditions improve further.

Equity bulls stumble as Covid fears grip investors

The mood across European markets darkened on Tuesday as surging Covid-19 cases on the continent dented risk sentiment.

Austria reintroduced a national lockdown on Monday to curb new infections spreading across Europe. However, fears continue to mount over larger countries in Europe following Austria’s lead, with Germany at the top of the list.

Across the Atlantic, US futures are pointing to a negative open as investors evaluate Jay Powell’s nomination for a second term as Federal Reserve Chair. When considering how his renomination boosted rate hike expectations and propelled Treasury yields higher, US equity bulls could face some obstacles down the road.

Dollar boosted by rate hike bets

Dollar bulls trampled on the currency markets yesterday after President Joe Biden nominated Jerome Powell for a second four-year term as Fed Chair. Lael Brainard, the other candidate, was seen as more dovish than Powell, although she will become Vice Chair, the White House announced.

Powell’s renomination injected dollar bulls with renewed confidence, as this means there will be policy continuity at a crucial time when US inflation is at a 30-year high. Markets are now expecting the Fed to raise interest rates from near zero in June 2022. This could fuel the dollar’s upside momentum if we hear more Fed chatter around a faster tapering of bond buying, with the Dollar Index already hitting a fresh 16-month high today.

On the data front, all eyes will be on the flash PMI for November which will provide insight into the health of the US economy. The dollar could extend gains if this data meets or exceeds market expectations.

Commodity spotlight – Gold

The likely re-election of Jerome Powell sent gold prices tumbling yesterday with bearish momentum rolling over into Tuesday’s session.

Gold stood little chance against an appreciating dollar and rising US Treasury yields, as markets continued to price in higher interest rates next year and beyond. Given how gold is a zero-yielding asset, it tends to perform poorly in a high interest rate environment. With prices down almost 3% since the start of the week, bears are clearly in the driving seat and may remain there for the rest of November, especially if bond yields advance higher.

Looking at the technical picture, it is certainly a painful sight to behold with gold falling from five-month highs into the 50, 100, and 200-day Simple Moving Averages. If bears break through this key support region and secure a solid weekly close below $1777, this could signal further downside in the short to medium term. Alternatively, a move back above $1800 could encourage gold bugs to push towards $1813 and $1832.

IMF Issues More Warnings for Nigeria

The International Monetary Fund (IMF) rarely has anything positive to say about the Nigerian economy.

We have seen the institution repeatedly urge Nigeria to increase monetary reforms, advising VAT hikes and even exchange rate unification. This week alone, the IMF warned of the possible risks associated with the eNaira.

However, it forecasted Nigeria to grow by 2.6% in a “subdued” recovery from last year’s recession which was a welcome development given how the initial projection was 1.5%. Indeed, Nigeria’s economy remains exposed to downside risks with the third-quarter growth figures illustrating the nation’s oil dependency despite efforts to diversify.

Back in September, the Central Bank of Nigeria estimated growth between 2.5% and 3% in 2021 as easing lockdown restrictions and increased vaccinations boosted business.

However, according to JPMorgan, Africa’s largest economy is likely to expand by 1.5%. Given how oil prices have appreciated considerably, this could support growth in the final quarter of 2021, resulting in an encouraging GDP figure. Nevertheless, Nigeria remains on a fragile road to economic recovery and this is likely to force the Central Bank of Nigeria to leave monetary policy unchanged in the short to medium term.

Commodity spotlight – Gold
It was a fairly uneventful week for gold prices despite rising inflation worries, an appreciating dollar, and subdued treasury yields.

Other than the burst of action mid-week, prices have traded within a tight range with support at $1850 and resistance around $1870. Gold seems to be waiting for a fresh directional catalyst as markets await more clues about how the Federal Reserve will manage rising inflation. In regards to the technical picture, a breakout could be on the horizon but this may require a potent fundamental trigger. Should bulls secure a solid weekly close above $1870, this may open the doors towards $1900-$1910. Alternatively, sustained weakness below this resistance level could trigger a selloff towards $1850, $1830, and $1800, respectively.

Commodity spotlight – Oil

Oil prices slipped on Friday as surging Covid-19 cases in Europe raised fears over a slow economic recovery while concerns over potential reserves releases enforced downside pressures. A stronger rubbed salt into the wound with Brent oil trading below $80 as of writing. Overall, bulls seem to have taken their feet off the pedal with oil prices struggling to push higher since the end of October. However, should the global supply-demand equation swing in favour of bulls over the coming months, this could encourage prices to rebound.

By Lukman Otunuga, Senior Research Analyst at FXTM

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