Skip to main content

Oil Price Slides and the Nigerian Naira Follows Suit

Dear Speculators,

A combination of crude oil supply disruptions due to pipeline vandalism and a 26 percent drop in crude oil price from its $53 per barrel highs in June this year has pulled the value of the naira down more than 10 percent since late June. At $42 per barrel, crude oil price appears to have bottomed out and is now edging higher. This mini resurgence has strengthened the naira which is now up about 1.6 percent in the last two days.

The sooner the Federal Government solves the militancy unrest issues in the Niger Delta, the better the prospects of an economic recovery within the coming months. Nigeria lost tens of billions of naira in the past month due to falling oil prices and militant attacks on crude oil pipelines. The Central Bank may choose not to respond directly to the weaker Naira since the economic fundamentals support a higher oil price this year settling somewhere above $50 per barrel leading to a stronger Naira.

We believe that a dollar-naira exchange rate of over 300 naira to a dollar is already price in into imported goods and services in the country, hence we worry very little about another inflation spike. However, we must state that although a stronger dollar is bad news for Nigerian companies with foreign debt, it is fantastic news for companies that export non-crude oil products.

Globally, we are starting to see the dollar weaken against major currencies as capital flows out of America. A lot of air pushed into the value of the United States dollar since the British pound plunged after the Brexit vote is starting to come out. A drop in the crude oil price is usually simultaneously followed by a stronger dollar, but not this time. We believe a shift in investment focus away from USA to emerging markets and falling dollar denominated external reserves of foreign nations, especially oil exporting nations will continue to weigh in on the dollar. The search for yield is becoming more and more difficult in America and Europe as the presence of a market bubble becomes more evident. This has driven investors to safe havens like bonds in the Developed economies and high yield securities in the emerging markets. Also, the uncertainty in the United States Presidential race is also causing worry to investors with large exposure in U.S.A. A bit of calmness has returned to Britain after the new Prime Minister was announced though the pound still remains considerably weak but the catastrophic size of non-performing loans in Italian Banks has raised tensions in the European markets.

We still believe that the naira will continue to weaken against the currencies of the developed nations going into the future. If you are a currency speculator, the last thing you want to be holding is the Nigerian Naira.


Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory

Comments

Post a Comment

Popular posts from this blog

The Wrong Forecaster

Dear Speculators, The gloominess of the Nigerian economic outlook has significantly knocked down the prices of some financial assets but the real value of some of these assets have been mildly affected. While recounting the economic misfortune that has befallen the country in the last two years is inevitable, dwelling on the past is a perfect time wasting activity. Luckily, investment is forward looking and not regressive thinking. The past is a great indication of the future but not a mirror for prediction. The randomness of the world ensures that yesterday looks at least slightly different from tomorrow. And if we have learnt anything from the history books, it is that good things do not last forever and bad times always have an end. Life is by definition cyclical. The key questions to ask before buying or selling any financial asset is; will the current economic situation last forever? Will the inflation rate remain in double digits over the next 5 years? Will the Nai...
Post a Comment
Read more

ECOWAS: The Silent Opportunity of a Weaker Naira

Dear Speculators, The catastrophic collapse in the value of Naira in 2016 has brought more bad news than good news to Nigeria. This has come at a time when currency manipulation in Japan, China and Switzerland to purposely erode the value of their currency in order to gain trade advantages has angered many foreign governments especially America. Britain was lucky to have had the Pound devalued by the financial markets in the aftermath of the Brexit to the delight of the Bank of England whom like many other Central Banks in the western world are now inflation seekers. But not Nigeria, we don't need a weaker Naira, at least not now. Unfortunately, the drastic fall in the oil price, current account deficit, lower foreign external reserves and withdrawal of foreign investments from Nigeria has dragged the Naira about 58% lower since its January levels at the interbank market. This has almost doubled the rate of inflation in the last one year as imported products make up a si...
Post a Comment
Read more

Concise Comprehension of The Daily Market Report

Dear Speculators, Everyday we are bombarded by the latest financial news, the closing share prices, the top gainers and losers, the volume traded and the market capitalization. Most of the news sound like gibberish to those who don't understand what the numbers mean and it sometimes causes panic to those who know how to read the market reports. It is for this reason that I wish to take you gradually through digesting the news and acting on information. Share prices simply reflect the equilibrium value of a financial asset as a result of the forces of demand and supply and may not reflect the true or intrinsic value of that asset at a particular point in time. The share price may go up or down depending on the demand and supply of that particular stock in the market. Any change in share prices is triggered by either a large demand or large supply of that stock in the market. The biggest influence on prices is the sentiments of the institutional investors and pension fund ...
Post a Comment
Read more