Dollar Problem 2.0? Fed Greenback Concern May Haunt Bulls Again – Bloomberg

  • Trade-weighted dollar index reaches strongest since 2002
  • Surge may thwart potential for more rapid hikes: State Street
 

What to Watch for in Janet Yellen’s Message

The greenback has been on a tear again, especially by the Federal Reserve’s own measure.

The central bank’s dollar gauge, which takes into account the biggest U.S. trading partners, has risen more than 3 percent since Donald Trump’s election victory, reaching the strongest since 2002.

But even before Nov. 8, Fed officials were already growing more concerned about the currency’s appreciation — as seen in changes in the wording of minutes of the Nov. 2 meeting, when policy makers cited the potential for the gains to damp prospects for quicker inflation. A widely expected Fed interest-rate increase Wednesday may only deepen their consternation.

“There’s definitely a shift in tone between the September and November minutes, and obviously since the November meeting the dollar’s carried on going up,” said Lee Ferridge, head of macro strategy for North America at State Street Global Markets in Boston.

If history is any guide, dollar bulls may suffer a self-inflicted blow from the Fed’s decision Wednesday, echoing events of a year ago, when Chair Janet Yellen referenced dollar strength following the central bank’s first hike in almost a decade. After the dollar index’s almost 11 percent rise in 2015, the biggest advance in almost two decades, the greenback went into retreat for most of the first half of this year.Now, Trump’s promises of fiscal stimulus have re-energized dollar bulls — hedge funds are the most optimistic since January on the greenback’s prospects. That stance faces a test as officials prepare to announce new forecasts for the year ahead. In September, policy makers estimated they’d raise rates twice in 2017.

“If we hadn’t seen the big dollar rally, maybe there’d be more chance that they’d add an extra dot for next year,” said Ferridge. “The dollar will mean that they’re going to err on the side of caution.”

For traders who were occupied with preparations for the U.S. Thanksgiving holiday, here’s an excerpt from the November minutes, which were released Nov. 23:

“Participants discussed possible policy implications of the risks surrounding the outlook for inflation,” including “the possibility that a further appreciation of the dollar stemming from developments abroad could renew disinflationary pressures and postpone the need for policy firming.”

The tone marked a shift compared with the minutes from the September meeting, when officials “pointed to a number of factors that they expected would contribute to above-trend output growth over the next few years,” including “diminution of the drag on net exports from a strong dollar.”

    The Currencies to Watch in 2017 – Bloomberg

    • Charts show momentum may continue for pound, krone and rand
    • Gilt, bund prices could rebound as yields meet resistance

    The pound, krone and rand are the currencies to watch heading into 2017 as technical charts and supportive cross-asset themes signal their recent momentum may continue.

    Emerging-market equities and oil prices may have bottomed, helping the Norwegian and South African currencies, while the pound has room to claw back sharp losses following the Brexit vote. In the rates world, German bund and U.K. gilt prices have the potential to rebound from now into the start of next year as the surge in yields meets strong resistance.

    • While GBP/CHF trades below the down-trendline from December 2015, leading MACD has already broken out bullishly, pointing to more spot upside. There’s scope for a deeper retracement to 1.3403-1.3603 (50 percent retracement and 61.8 percent Fibonacci, trendline and cloud base) where tactical consolidation may emerge. Above here will bring into frame a 1.40 target-zone (9 percent from the current spot), which captures a larger order Fibonacci and cloud top (note: cloud top drops to 1.35 in late March). High-price distribution at about 1.40 may trigger another round of consolidation.
    • A weekly close below 1.2253 would question the bullish setup.
    • EUR/NOK rolled over in November against its 100-week moving average (9.1217), which confirmed its role-switch from support-to-resistance. The first target support is at 8.8610 (61.8 percent Fibonacci) and then 8.6515-6413 (76.4 percent Fibonacci and 200-week moving average). An overshoot target is at 8.3128 (2015 low), 7 percent away from the current spot
    • The krone’s bullishness ties in with a constructive medium-term view on crude oil prices (see more here).
    • A weekly close above 9.1217 (the 100-week moving average) would question the bearish stance.
    • The USD/ZAR chart shows consolidation since August below its 55-week moving average at 14.78, with the trend outlook staying bearish while below that level. It could break 13.20 support to target 12.23-10, the 50 percent retracement of its 2011-2016 rally and the 200-week moving average level. This would be a move of 12 percent from its current level.
    • Also supportive is the emerging market equity index bounce in mid-Nov. from a neckline of an inverse head-and-shoulders pattern, as well as the emerging market foreign-exchange index carving a bottom against weekly cloud support.
    • A weekly close above 14.65 in USD/ZAR would question this bearish scenario.
    • In German bunds, mean-reversion risks are intensifying in 10-year yields as the top of ichimoku cloud curtails the surge for a second week (this week at 41bps), in a development similar to last December when the cloud top was rejected in every single weekly test.
    • Yields are also facing resistance from 42-43bps, the late October break-down point and 50 percent retracement of the 2015-2016 rally; nine-week RSI is at about 70 (just like last December). Setbacks may find support from 21-ExpMA and the 50 percent retracement of the latest selloff at 15bps-13bps.
    • A weekly close above 43bps this week (or this month) would be a significant bearish development for bunds and opens up 58bps (61.8% Fibonacci) and then the 74bps level seen last December.
    • Gilt yields are testing major trend-band resistance at 1.43 percent/1.51 percent, which also captures the weekly cloud hurdle. The appearance of trend-exhaustion candle counts (current count is 10) on weekly charts may lure tactical buyers. Provided yields do not exceed the 1.51 percent high this week, the retracement target levels are at 1.27 percent (23.6 percent Fibonacci) and 1.12 percent (38.2 percent Fibonacci).

      NOTE: Sejul Gokal is a technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

    Trump Spell on Markets Hasn’t Swayed Economists Judging Fed Path – Bloomberg

     
    • Gradualism to stay in place until Fed sees actual fiscal plan
    • Stronger dollar to continue weighing on growth next year

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    Fed’s Key Question Is How Fast to Raise Rates: Reinhart
     
    What to Watch for in Janet Yellen’s Message
    U.S. Stockpile Build Surprises Global Oil Market
     

    Fed’s Key Question Is How Fast to Raise Rates: Reinhart

    Donald Trump’s election victory provoked a big shift in bond market expectations for U.S. growth and inflation but economists still only expect the Federal Reserve to raise interest rates twice next year.

    Respondents to a Bloomberg survey also predict that if the Fed announced a rate hike at the conclusion of its two-day meeting on Wednesday in Washington, which is viewed as a foregone conclusion, it won’t move again until June.

    “The Fed doesn’t want to be premature judging economic policies,” said Priya Misra, head of global interest rate strategy at TD Securities LLC in New York. “They are not going to give up on a strategy that has served them well — staying lower for longer to get more people into the labor force.”

    U.S. equities have rallied and bond markets slumped since Trump’s Nov. 8 election win as investors bet his campaign promises for tax cuts and infrastructure investment will boost growth and lift inflation. Ten-year Treasury note yields have jumped to 2.45 percent compared to 1.83 percent the day before the vote, and the Standard & Poor’s 500 stock index is up 5.9 percent.

    Still, economists are confident that the gradual pace of rate hikes the Fed first signaled last December is going to persist into 2017 and will be the dominant message from this week’s policy meeting as officials wait to see what policies Trump actually puts in place.

    Wait for June

    If Fed officials raise the benchmark lending rate this week, the next hike will be in June, according to an average 35 percent probability assigned by survey respondents. They attributed a 25 percent probability of the next hike occurring in March, and a 12 percent chance of the Fed waiting until November.

    When the Fed raised interest rates a year ago, it used the word “gradual” twice to describe its policy outlook, and said the federal funds rate is “likely to remain, for some time, below levels that are expected to prevail in the longer run.” That phrasing remained in the statement in November.

    Laura Rosner, senior U.S. economist at BNP Paribas in New York, said the language is a form of forward guidance and it’s too early to remove it.

    “It is possible that they take out a little bit of the gradualist rhetoric eventually,” Rosner said. “But March seems too early. It took the Fed a long time to conclude we are in a low inflation, low-rate world and I wouldn’t expect their assessment to change quickly.”

    Labor Slack

    Some 61 percent of survey respondents backed up their case for gradualism by saying the U.S. economy is “close to but not at full employment,” while another 10 percent said “substantial slack remains” in the labor market.

    The unemployment rate stood at 4.6 percent in November, the lowest in nine years, while a broader measure that includes involuntary part-time workers was still above pre-recession levels.

    Eighteen of the 41 economists surveyed said Fed officials’ median estimate for the lowest sustainable unemployment rate, a proxy for full employment, would fall by more than 0.1 percentage point from the September estimate of 4.8 percent. Some 37 percent of economists in the survey said the median would remain the same this month.

    Almost two-thirds of the economists said that by March U.S. central bankers will project a faster pace of tightening in their quarterly economic projections for the next two years than they will this month. One third said they wouldn’t alter the path in March.

    Almost 40 percent of economists said the Fed moving ahead of other major central banks in its interest-rate tightening cycle may lead to slower growth next year due to the drag on exports. A third said the most important consequence of policy divergence would be tighter financial conditions and the potential of slower growth from currency appreciation.

    “The stronger the dollar the greater the likelihood you will see a slow, gradual pace of rate hikes” from the Fed, said Karl Haeling, head of strategic debt distribution at Landesbank Baden-Wuerttemberg in New York. “It definitely keeps a lid on inflation and limits the degree to which there is any acceleration in growth.”

    Nigeria records N2.17trn revenue as oil income shrinks – Businessday

    Nigeria’s government says despite shrinking oil revenues, it was able to generate a total of N2.17trillion revenues as at end September 2016, representing 75 percent of total projections for this fiscal year.

    Releases so far for capital and recurrent expenditures presently amounts to N3.58trillion representing 79percent of the prorated figures in the budget.

    President Muhammadu Buhari said on Wednesday while presenting the proposed N7.298 trillion proposed 2017 budget to a joint session of the National Assembly that the releases so far were despite the fact that government aggregate revenue inflow were below projections.

    “As at 30 September 2016, aggregate revenue inflow was N2.17 trillion or 25percent less than pro rated projections. Similarly, N3.58
    trillion had been spent by the same date on both recurrent and capital expenditure, Buhari said adding that this is equivalent to 79percent
    of the pro rated full year expenditure estimate of N4.54 trillion as at the end of September 2016,” the president stated.

    He said despite huge financial challenges faced by the country, debt service obligations and personnel costs have been met while overhead costs have been largely covered.

    In his speech shortly before presenting the 2017 budget estimates a the joint session, Buhari said the releases for capital projects are by far the highest in recent history.

    “Although capital expenditure suffered as a result of project formulation delays and revenue shortfalls, in the five months since
    the 2016 Budget was passed, the amount of N753.6 billion has been released for capital expenditure as at the end of October 2016.
    “It is important to note that this is one of the highest capital releases recorded in the nation’s recent history. In fact, it exceeds the aggregate capital expenditure budget for 2015” Buhari said at the National Assembly.

    The 2016 Budget of change was predicated on a benchmark oil price of US$38 per barrel, oil production of 2.2 million barrels per day and an exchange rate of N197 to the US dollar.

    On the basis of these assumptions, aggregate revenue was projected at N3.86 trillion while the expenditure outlay was estimated at N6.06
    trillion. The deficit of N2.2 trillion, about 2.14% of the GDP was expected to be mainly financed through borrowing.

    The implementation of the 2016 Budget, assented to in May this year has been largely hampered by a combination of relatively low oil
    prices in the first quarter of the year, and disruptions in crude oil production leading to significant shortfalls in projected revenue.
    This, according to the President negatively affected revenue collections by the Federal Inland Revenue Service and the Nigerian
    Customs Service.

    The President explained that the 2016 N6.06trillion budget of change was prepared on the principles of zero based budgeting to ensure
    resources were prudently managed and utilized solely for the public good. The same principles were used in the preparation of the 2017
    budget, he said.
    On efforts to reflate the economy, Buahri said the government will continue to focus on the stabilisation of sub-national government
    finances as a key objective to stimulate the economy.

    He recalled that in June 2016, a conditional Budget Support Programme was introduced, which offered State Governments N566 billion to
    address their funding shortfalls. To participate, State Governments were required to subscribe to certain fiscal reforms centered around
    transparency, accountability and efficiency. For example, States as part of this program were required to publish audited accounts and
    introduce biometric payroll systems with the goal of eliminating ghost workers.

    Cost cutting measures which include restricted travel costs, reduced board members’ sitting allowances, conversion of forfeited properties
    to Government offices to save on rent and elimination of ghost workers the President said will lead to savings of close to N180 billion per
    annum which will be applied to critical areas including health, security and education.

    He said work has also resumed on a number of stalled infrastructure projects such as the construction of new terminals at the country’s
    four major airports. While major road projects, key power transmission projects, and the completion of the Kaduna – Abuja railway have also commenced.

    2017 budget: Buhari pledges rapid development of rail, roads, power infrastructure – Businessday

    By KEHINDE AKINTOLA, OWEDE AGBAJILEKE & ELIZABETH ARCHIBONG, Abuja

     

     

    President Muhammadu Buhari on Wednesday unveiled the administration’s plan to focus on rapid development of infrastructure especially on modernisation of railway system, roads and power with the 2017 N7.298 trillion budget he calls spending for “economic  recovery and growth”.

    He also assured that his administration’s resolve to address some of the legacy contractor liabilities inherited estimated at N2 trillion.

    “We also have an ambitious programme for growing our digital platforms in order to modernise the Nigerian economy, support innovation and improve productivity and competitiveness. We will do this through increased spending on critical information technology infrastructure and also by promoting policies that facilitate investments in this vital sector.

    “During 2016, we conducted a critical assessment of the power sector value chain, which is experiencing major funding issues. Although Government, through the CBN and other Development Finance Institutions has intervened, it is clear that more capital is needed. We must also resolve the problems of liquidity in the sector.

    “On its part, Government has made provisions in its 2017 Budget to clear its outstanding electricity bills. This we hope, will provide the much needed liquidity injection to support the investors.

    “In the delivery of critical infrastructure, we have developed specific models to partner with private capital, which recognize the constraints of limited public finances and incorporate learnings from the past. These tailor-made public private partnerships are being customized, in collaboration with some global players, to suit various sectors, and we trust that, the benefits of this new approach will come to fruition in 2017.

    He also pledged to optimize the use of local content and empower local businesses in its effort towards economic recovery and growth plan for year 2017.

    To achieve the feat, the assured that his administration’s commitment to aligning and underpin fiscal, monetary and trade policies by using policy instruments to promote import substitution while protecting public interest.

    In the bid to achieve its revenue target for the year, Buhari reiterated the administration’s plan to achieve the 2.2mbpd crude oil production and invest the proceeds to revive our agriculture and industries.

    “In addition, we will continue our ongoing reforms to enhance the efficiency of the management of our oil and gas resources. To this effect, from January 2017, the Federal Government will no longer make provision for Joint Venture cash-calls. Going forward, all Joint Venture operations shall be subjected to a new funding mechanism, which will allow for cost recovery. This new funding arrangement is expected to boost exploration and production activities, with resultant net positive impact on government revenues which can be allocated to infrastructure, agriculture, solid minerals and manufacturing sectors.

    He disclosed that Federal Ministry of Environment was increased by N9.52 billion (an increase of 92% over the 2016 allocation) for climate change and leveraging private sector funding for the clean-up of the Niger Delta.

    In th area of agricultural develooment, Buhari who applauded the successes recorded in the area of domestic rice production, disclosed that Federal Ministry of Agriculture and Rural Development, Central Bank of Nigeria (CBN), Organised Private Sector and a handful of Nigerian commercial banks, have embarked on an ambitious private sector-led N600 billion program to push us towards self-sufficiency in three years for these products.

    To this end, he urged all State Governors to make available land to potential farmers for the purpose of this program.

    In his remarks, Speaker Yakubu Dogara emphasised the need for President Buhari to create a new order in the budget implementation, just as he stressed the need foe him to add distorted budget cycle and abandoned capital projects/white elephant projects, to the list of things, in addition to corruption, that he must kill.

    He observed that the lofty goals enshrined in the budget document presented by the President was designed to take Nigeria out of economic recession and achieve significant economic growth for our nation.

    While expressing regrets over cwrtain frustrations on the annual budget cycle/process, Dogara stressed the need to unlock the full potentials of such budgets for the benefits of the citizens.

    “This is because implementation and execution of the agreed Budget is always a major challenge year in year out. Sometimes, implementation rate is as low as 30%, most times it is never higher than 50% at the best of times. This has led to unacceptably high rate of abandonment of projects and distortions in Nigeria’s economic planning. Of course, this is an inherited problem for Mr President as he has only effectively passed through one Budget cycle.

    “As I counseled last year, an Appropriation Act must be allowed to run for an uninterrupted period of twelve months, for the Executive to have enough time to execute it. This means that both Mr. President and the National Assembly must find a way to continue the execution of the 2016 Budget especially the capital component till May 6, 2017, which is twelve months from the date Mr President signed the 2016 Appropriation Bill.

    “This is also the clear intendment of the definition of a Financial Year in Section 318 of the Constitution. The problem is that most often the recurrent component of the Budget is implemented to an appreciable level, but the capital component execution is very low.  It is crystal clear that the capital component of the 2016 Budget cannot realistically be implemented for only six months period considering the time required for procurement processes and the raising of the revenue including loans by government.

    “Except something is done, this will result in yet another failed budget. A vicious cycle repeated every year. We must therefore put on our thinking caps and ensure that the change promised Nigerians is reflected in our budget process, as we cannot really make appreciable progress as a nation without significant implementation of the Capital component of the budget.

    “This calls for creativity which cannot be realised if we do not lose our fear of being wrong. By being creative in this area, Mr President will build a new order that makes the existing order obsolete. There is no better way by which real change is attained.

    While assuring Buhari’s of continued cooperation and partnership in all measures proposed to revamp our economy, stressed the need to make our annual budgets work for all our citizens, especially the poor and the vulnerable.

    “This is a task all of us must be supremely devoted to. It was President J.F Kennedy, who in his timeless and resonating admonishment to the rich and powerful reminded us that, “if the society cannot help the many who are poor, it cannot save the few who are rich”. Sadly, this is fast becoming true of our society right now,” Dogara said.

    Nigerian Petroleum Development Co says lost $4.9 bln to attacks this year – Reuters

    ABUJA Dec 14 (Reuters) – The Nigerian Petroleum Development Company (NPDC), a subsidiary of state oil firm NNPC, said on Wednesday it had lost 1.5 trillion naira ($4.9 billion) due to attacks on its facilities since the beginning of the year.

    The subsidiary of the Nigerian National Petroleum Corporation specialises in exploration and production of oil.

    Militants’ attacks in the oil-rich Niger Delta have severely hobbled production this year, at one stage reducing output by more than a third.

    ($1 = 304.4500 naira) (Reporting by Ulf Laessing and Paul Carsten; editing by David Clarke)

     

    Nigerian shares rise to five-week high on oil, banking stocks – Reuters

    LAGOS Dec 14 (Reuters) – Nigeria’s main stock index jumped to a five-week high on Wednesday, climbing 1.29 percent, as rising prices for crude oil, the mainstay of the Nigerian economy, led to gains for oil and banking shares.

    The stock market gained for the second straight day, rising above 26,000 points, a level last seen on Nov. 8.

    The Organisation of Petroleum Exporting Countries and non-OPEC producers last week agreed to curtail crude output and prop up global prices, their first joint agreement since 2001. More than two years of low prices have stretched budgets and spurred unrest in some countries.

    Nigeria’s government gets around two-third of its revenues from oil sales. The country is now facing a recession brought on by the effects of low crude prices since mid-2014.

    On Wednesday, the president presented a record 7.29 trillion-naira ($23.94 billion) budget for 2017 to lawmakers, hoping that the recent rise in crude prices would support government spending next year, which also lifted equities.

    The government struggled to fund its 2016 spending plan as oil prices stayed low.

    Shares of fuel retailer Forte Oil rose the maximum 10 percent the stock exchange allows. Gas producer Seplat rose 6.7 percent. Pan-African bank Ecobank rose 4.9 percent and Diamond Bank 3.5 percent.

    ($1 = 304.45 naira) (Reporting by Oludare Mayowa; Editing by Chijioke Ohuocha, Larry King)

     

    Nigeria’s Buhari presents 7.298 trillion naira 2017 budget to lawmakers – Reuters

    Dec 14 Nigeria’s President Muhammadu Buhari on Wednesday presented a record 7.298 trillion naira ($23.97 billion) budget for 2017 to lawmakers, which he said was an increase of 20.4 percent on last year’s spending plan.

    He said the budget was based on an exchange rate of 305 naira to the dollar and a projected oil output of 2.2 million barrels per day at an assumed price of $42.5 dollars per barrel.

    (Reporting by Paul Carsten, Ulf Laessing and Oludare Mayowa; Writing by Alexis Akwagyiram; Editing by Chijioke Uhocha)

    Buhari says Nigeria faces worst economic situation in its history – Reuters

    ABUJA Dec 14 (Reuters) – Nigeria’s President Muhammadu Buhari said on Wednesday the country was facing the worst economic situation in its history, in a speech to lawmakers to present the 2017 budget.

    Africa’s biggest economy is in recession for the first time in 25 years, largely brought on by low oil prices. The OPEC nation relies on crude oil sales for two-thirds of government revenue. (Reporting to Paul Carsten and Ulf Laessing,; Writing by Alexis Akwagyiram)

     

    Nigeria’s Buhari says he wants oil output to return to 2.2 mln bpd – Reuters

    ABUJA Dec 14 (Reuters) – Nigeria’s President Muhammadu Buhari told lawmakers in his 2017 budget presentation on Wednesday that he wants to restore oil output to 2.2 million barrels per day.

    A series of attacks since January on energy facilities in the southern Niger Delta cut oil production in the OPEC member, which stood at around 2.1 million barrels per day at the start of 2016, by more than a third earlier this year.

    “We must all come together” to achieve peace in the Niger Delta, said Buhari. (Reporting by Paul Carsten and Ulf Laessing; Writing by Alexis Akwagyiram; Editing by Chijioke Ohuocha)