Forget The Fed: The Long Bond Is Deciding the Dollar’s Future - WSJ
Short-term interest rates aren’t the big deal to currency markets that they once were
By James Mackintosh
The foreign exchanges have a message for central bankers: the short-term interest rates they set aren’t the big deal they once were. After more than $12 trillion of quantitative easing world-wide, currency markets are now more sensitive to the gyrations of the long-dated bonds vacuumed up by the central banks—and that makes them even harder to predict than usual.
The change comes at a delicate time for central banks, with the U.S. tentatively cutting its holding of Treasurys and mortgage bonds by $10 billion a month and the European Central Bank about to taper its bond-buying program. A currency market more focused on long-dated bonds gives policy makers less control over exchange rates and domestic financial conditions than usual, just at a moment when they want to keep a firm grip to avoid upset.
In the past it was short-term interest rates—and the two-year bond yield, which reflects near-term anticipated rate changes—that were most important for major currencies. The more interest it was possible to earn in a country, the more money was attracted, and the more the currency went up. The extra yield available on U.S. two-year bonds above German two-year bonds, for example, was typically tightly correlated with moves in the dollar-euro exchange rate.
Bonds and the DollarThe link between the dollar and the extra income available from U.S. safe assets is strong. Unusually,this year the link was stronger with long-dated bonds than short-dated ones.Correlation between weekly change in dollar-euro exchange rate and in spreads between Treasurysand German bunds
%10 yearTwo year2000’02’04’06’08’10’12’14’16’18-20-1001020304050607080
Correlation between weekly change in dollar-yen exchange rate and in spreads between Treasurys and Japanese governmentbondsTHE WALL STREET JOURNALSource: Thomson Reuters DatastreamNote: Correlation of weekly change, rolling 47 weeks (2017 so far)
%10 yearTwo year1996’982000’02’04’06’08’10’12’14’16’18-60-40-2002040608010 yearxJune 15, 2001x16.536%
There are at least two really good reasons why this should be causal, not merely chance correlation. First, money flows. Higher interest rates attract short-term speculative cash chasing what traders call “carry,” the extra interest available in one currency over another. Second, fundamentals. Higher rates are a sign that an economy is doing better or inflation is rising, both of which justify a stronger currency, at least in nominal terms.
The logic has broken down this year for both flows of money and fundamentals, and the year-to-date correlation between 10-year yield differentials and the dollar’s value against each of the euro, yen and sterling hit the highest since at least the early 1990s in September.
Japanese and European investors have been buying longer-dated U.S. Treasurys because of negative interest rates on cash and short-dated bonds at home, so flows are more sensitive to long bond yields than in the past. At the same time, central banks are suppressing the usual reaction of economic fundamentals. The ECB has promised not to raise rates for a long time, even as the eurozone economy is growing at its fastest pace in five years. That means speculation about economic fundamentals moves longer-dated bonds a lot more than short-dated bonds, and in turn moves the currency.
“The short-term [rates] differential contains less information because you essentially have stability of short-term rates in Europe,” says Amundi fixed income and foreign exchange strategist Bastien Drut in Paris. Instead, the German 10-year bund swung about as bets on the ECB reacting to a stronger economy by pulling back from its bond-buying program ebbed and flowed—and the euro’s value against the dollar moved with it.
Even during the rally in the dollar in the past two months the focus has stayed on long bonds, as 10-year Treasury yields rose more than those on Germany’s bunds, which are still well below their July high for the year.
The focus on long bonds helps explain why many traders were caught off guard by the plunging value of the dollar this year, when the currency disconnected from its usual tie to short-term yields. The dollar dropped even as the Federal Reserve raised the overnight policy rate twice, with a third raise expected next month. What mattered instead was the 10-year Treasury yield, which plummeted from 2.5% in late December to a low of 2.05% in September, even as German 10-year bond yields picked up and Japanese yields did almost nothing.
Technically the major central banks should care little about the currency, with policy about the dollar the preserve of the U.S. Treasury and the ECB targeting inflation, not the exchange rate. In practice a stronger or weaker currency can have dramatic effects on how tight monetary policy is, neutralizing or exaggerating the effects of changes in interest rates.
This year the Fed’s efforts to tighten monetary policy have been undone by the weaker dollar and lower 10-year yields, which supported booming credit and equity markets. The U.S. has the loosest financial conditions since 1993, according to a measure compiled by the Chicago Fed, despite two rate rises. Back in 1993 bond differentials were strongly tied to the value of the dollar, although back then short-dated bonds mattered more.
With inflation still below target, the Fed hasn’t been that bothered by the failure of its interest-rate policies to bite. If that changes, 1993 was a past that would make an unpleasant prologue: the following year the Fed seized control with surprise rate increases that shocked investors, pushing up bond yields and breaking their link to the dollar entirely.
Write to James Mackintosh at James.Mackintosh@wsj.com
Expectations as Monetary Policy Committee meet to review interest rate - BUSINESSDAY
With the country being out of its five straight quarterly contraction and falling inflation rates, the monetary policy committee (MPC) of the central bank is scheduled to have its last meeting of the month on 20th and 21st of November 2016, and there are high expectations on the outcome.
The MPC had on September 2017 held on to the 14% interest rate to observe various economic indicators – including growth, budget implementation in order to curb inflation, make naira attractive, increase foreign direct investment(FDI),and also help our bleeding external reserves. The last time the interest rate was changed was in July 2016 when the CBN monetary rate was moved from 13percent to 14percent.
At a communiqué issued after the MPC meeting in September, “the Committee believes that the effects of fiscal policy actions towards stimulating the economy have begun to manifest as evident in the exit of the economy from the fifteen-month recession. Although still fragile, the fragility of the growth makes it imperative to allow more time to make appropriate complementary policy decisions to strengthen the recovery”.
DolapoAsiru CEO CLG Securities Limited while reacting to the forthcoming MPC meeting, “He foresees a do-nothing MPC next week Monday, although he admitted that all indication shows the interest rate will come down but not this year. He foresees the rate coming down from Q1, 2018”.
With FOREX now relatively stable, Inflation rates decreasing to 15.98percent, and External reserves at $33.69b and increase in dollar stability. Analysts are expecting a looser policy from the MPC scheduled to meet next week Monday. According to Moscow based investment firm Renaissance Capital, “MPC believes we will have more clarity on growth and inflation by first quater 2018. We think the committee may start cutting the policy rate at the March 2018 meeting, by 1 ppt. Additional arguments in favour of looser policy are: inflation is not demand driven; we see non-food inflation slowing to 10-11% in first quarter 2018″
Ayo Akinwummi says “they will likely reduce MPR due to stability in the economy and the positives coming from foreign exchange. On the implications of the reduction of MPR, “the yield in the market will go down and source of funds may likely go down and with improvement on the economy credit accessibility will also increase”. Akinwummi added
On the reason for the for the MPC rate still at 14% as at September 2017 The CBN Governor Mr Godwin Emefiele addressing newsmen at the last MPC meeting said “we are Conscious of the prevailing market sentiments in favour of a rate cut; the committee reasoned that most of its decisions in 2016 were informed by the need to address the delicate balance between price stability and growth. Noting that the pressures on consumer prices were yet to abate and even as the economy continued to be in recession despite the intervention support by the CBN, the committee stressed that it was not oblivious of the full ramifications of the economic challenges facing the country,“
On the implication of the interest rate remaining at 14percent ,Mr DolapoAsiru said ”Banks will gradually embrace the fact that the case of high interest income is coming to a close; banks will start doing proper lending rather than placing money on Treasury bill.”
The MPC will also be reviewing the cash reserve ratio, liquidity ratio and asymmetric corridor. Majority of the key stakeholders in the economy will be monitoring the outcome of the meeting and be expecting the CBN to be more hawkish in its policies.
Nigeria, US sign MoU to deepen economic cooperation - BUSINESSDAY
Investors dumped Zimbabwean stocks every day since the military seized power on optimism that 93-year-old President Robert Mugabe will be forced to step down.
The stocks, which are denominated in U.S. dollars and were used to hedge against rising inflation, fell 10 percent on Monday to an eight-week low of 387.38, bringing the Zimbabwe Stock Exchange Industrial Index’s retreat since the army’s takeover on the morning of Nov. 15 to 27 percent.
The bourse’s market capitalisation has plunged $4.8 billion in that period to $11.1 billion, according to data compiled by Bloomberg and the Zimbabwe Stock Exchange.
Zimbabwe’s stocks soared this year after the government printed a new form of money — called bond notes — to deal with a cash shortage, stoking concerns over price growth in a nation that saw inflation jump into the billions of percent about a decade ago. While the southern African nation has mostly used the dollar since scrapping its own worthless currency in 2009, greenbacks have become scarce as Zimbabwe’s balance of payments position has worsened.
Investors pointed to the so-called Old Mutual gap as a sign of how unrealistic Zimbabwean valuations had become. While the insurer’s shares trade at the dollar-equivalent of about $2.52 in London and Johannesburg, they rose to $14.30 by Nov. 14 in Harare, Zimbabwe’s capital. They have since fallen to $9.25.
The developments have “materially improved the prospect of a change in leadership and an ultimate re-opening of foreign capital inflow,” driving the Old Mutual Implied Rate down, Hasnain Malik, an analyst at Exotix Capital in Dubai, wrote in a note on Monday. “Falling local share prices are, until OMIR approaches zero, a reflection of increasing macroeconomic optimism.”
AU to investigate sale of African migrants as slaves in Libya - BUSINESSDAY
The AU said on Tuesday it had launched an investigation into the sale of African migrants as slaves by armed groups in Libya.
“The AU would try to get access to illegal detention centres in which migrants were held without charges.
“We have asked the Libyan authorities to facilitate the ongoing inquiries. The perpetrators will be dealt with through the justice system,’’ AU Commission Chair, Moussa Mahamat told journalists in Ethiopia’s capital, Addis Ababa.
Mahamat said the AU had dispatched its Commissioner for Social Affairs, Amir El-Fadil as a special envoy to Libya to launch the inquiry, the News Agency of Nigeria (NAN) reports.
The AU has appealed to its 55 member states to provide logistics support to enable the evacuation of the migrants held in Libya to their countries of origin.
The AU decision to launch an investigation comes days after American television network CNN broadcast footage of African migrants being auctioned off as slaves in Libya for as little as 400 dollars.
UN Secretary-General, Antonio Guterres had on Monday said he was “horrified’’ by the footage.
Nigeria earns N271.77bn from solid minerals in eight years - THE GUARDIAN
By Roseline Okere
* NEITI calls for release of N30bn development funds
Nigeria earned a total of N271.77 billion from 2007 to 2015, according to the latest data from the Nigeria Extractive Industries Transparency Initiative (NEITI).
NEITI, which made this disclosure in a report released weekend, explained that the country in 2007, earned N8.19 billion; 2008, N9.58 billion; 2009, N19.42 billion; 2010; N17.36 billion; 2011, N26.92 billion; 2012; N31.44 billion; 2013; N33.86 billion 2014, N55.80 billion; and 2015, N69.2 billion.
To sustain this growth and further enhance the capacity of the sector to contribute to the economy, NEITI called for “the speedy release of the N30 billion solid minerals development fund recently approved by the Federal Executive Council to the intended beneficiaries, to support some of the activities already stipulated in the Roadmap for the sector.”
The audit report disclosed that the total production of solid minerals in the country stood at 39.27 million tons. This represents a reduction of 17 per cent from the 47.1 million tonnes produced in 2014. The drop in 2015’s production was attributed to insecurity in parts of the country and more stringent approval process for explosives used in mining.
However, while mineral production reduced, government revenues went up in the same year. “This increase in revenue was due to the growth in taxes collected from the sector and review of royalty rates paid by companies which came into effect within the year under review,” the report stated. NEITI’s previous solid minerals audit reports had recommended upward review of Nigeria’s royalty rates to align with prevailing industry and present day realities.
The report also disclosed that the value of solid minerals exports in 2015 stood at $9.733 million, which was 1.45 per cent of non-oil exports for the year. Lead and zinc topped the chart with 79 per cent valued at $7.7 million, while 175 ounces of gold valued at only $122,000 were exported during the period.
The report showed that the solid minerals sector contributed 0.12 per centt to Nigeria’s Gross Domestic Product (GDP) in 2015, a marginal increase of 0.01 per cent on the 0.11 per cent contribution of the sector to GDP in 2014.
“This report shows evidence that the contribution of the solid minerals sector to government revenues and macro-economic indicators is beginning to improve, even if marginally,” said Waziri Adio, NEITI’s Executive Secretary. “The sector could definitely contribute more to revenues, job and wealth creation, exports, imports substitution, industrial development and overall national growth.”
“But there is a sign of progress already,” Adio added. “What we need to do is to build on, deepen and sustain this early promise to ensure that the country returns to being a major mining destination and maximizes the abundant opportunities offered by the sector”.
“Faithful and sustained implementation of the roadmap developed by the Ministry of Mines and Steel Development and of the recommendations in this report will be necessary.”
Operators in oil, gas sector charged to be proactive - THE GUARDIAN
By Inemesit Akpan-Nsoh Uyo
Operators in the oil and gas industry in the country have been urged to be more responsive and proactive by latching on the Federal Government’s unrelenting efforts at reforming the hydrocarbon industry to become more attractive to investors.
This advice was given by the Permanent Secretary, Ministry of Petroleum Resources, Dr. Folasade Yemi-Esan at the on-going technical session/meeting of officers and experts at the 2nd National Council on Hydrocarbon, in Uyo Akwa Ibom state capital.
The Permanent Secretary who is chairing the technical session noted that, since the inauguration of the council in 2016, it has brought a turning point in the oil and gas sector, stressing that, the industry now has sustainable platform to grow linkages for the convergence of ideas.
With the theme, ‘7 Big Wins; Framework For Realizing the Potential of Hydrocarbon’, she explained that, all the reforms and other initiatives by government are all aimed at making the country oil and gas sector attractive to both domestic and foreign investors.
With participants drawn from oil producing state, services chiefs, SSS, Police, National Assembly, traditional rulers, indigenous oil companies, NGOs, host communities, among others, she noted that it was time to diversify the sector as such would certainly opened up the sector to more business opportunity and at the same time provide viable source of revenue to the country.
“It is envisaged that this technical session of officers and experts would evolve in a manner that would consistently assist council to channel its resolutions towards the strengthening of policies and initiatives in the oil and gas sector.
“With constant fluctuation in oil revenues globally, it is only wise to begin to leverage on creative means of diversifying the oil and gas sector so as to open up the sector to more and better business opportunities as well as provide viable source of revenue for the country as encapsulated under the aims and objectives of the 7 Big Wins”, she said.
She expressed the hope that, with the caliber of participants, their contributions would help government at arriving at decisions that would make the oil and gas sector attractive to investors.
Earlier, the commissioner for Transport and Petroleum Oman Esin, who represented the governor, Udom Emmanuel, expressed the hope that with proper implementation of programmees and policies in the hydrocarbon sub sector, such would go a long way into making the oil and gas sector investor friendly.
He noted that, as a state, it has forwarded a lot of Memos to the technical committee for considerations, noting that, once such are given considerations, it would mean a serious in-road into the development of the Hydrocarbon industry.
“I wish to urge the Technical Committees to consider policies that will fast-track exploitation of hydrocarbon in a safe, secure and friendly environment for the benefit of the nation and the development of the Host Communities”, he said.
Lagos fixes N1.3m as tentative fare for 2018 Hajj - NAN
By Abdulrahman Kadiri
The Lagos State Muslim Pilgrims’ Welfare Board has announced the sum of N1.3 million as tentative fare for the 2018 Hajj exercise.
Mr Muftau Okoya, Executive Secretary of the board, told the News Agency of Nigeria (NAN) on Tuesday in Lagos that sale of forms for the 2018 exercise has also commenced.
He said that the early commencement of preparations was to avoid hiccups and to make payment easy and flexible for intending pilgrims.
“Intending pilgrims are to collect forms from the Board’s office in Ikeja at the cost N10,000.
“In respect of the Hajj fare, an initial deposit of N1.3 million has been approved, pending when the National Hajj Commission of Nigeria (NAHCON) will release the official price.
“There is also an opportunity for installmental payment with at least N100,000 minimum deposits,” he said.
He advised intending pilgrims to make payment on time to avoid logistics challenges experienced during last operation.
“We have commenced preparations early to avoid some of such challenges.
“The policy of first-come-first-served will be applied in the allocation of pilgrims to hotels, tents and other facilities by NAHCON,” he said.
He noted that the increase in the number of pilgrim allocation to countries without commensurate upgrade in facilities created a major challenge during the 2017 Hajj.
“Our greatest challenge in the last operation was in Muna.
“There was an upsurge in the number of pilgrims because Saudi authorities admitted too many pilgrims at the detriment of the available facilities.
“So the facilities were overstretched to the extent that Lagos pilgrims encountered the problem of accommodation in Muna.
“But Lagos State pilgrims put their maturity to test by ensuring that these challenges were overcome with patience and understanding,” he said. (NAN)
Shippers’ association says Nigeria loses one trillion Naira to cargo diversion - PUNCH
The Shippers’ Association Lagos State (SALS) on Tuesday said the country lost N1 trillion annually through cargo diversion to ports in neighbouring countries due to bad roads to Lagos ports.
Mr. Jonathan Nicol, SALS President told reporters in Lagos that the losses arose from import duties and other charges not paid to Nigerian ports.
According to him, there is massive diversion of Nigeria-bound cargo to ports in neighbouring countries due to bad access roads to Lagos ports.
The shippers said that demurrage, terminal charges and storage fees incurred by shippers ran into billions of naira daily.
“There are also queue of vessels within the Lome waters awaiting call-up for berthing in Lagos ports.
“This will attract port congestion levy on cargo, which is no fault of the shippers (importers and exporters).
“Demurrage on containers is increasing with no control from maritime agencies. Importers and exporters are suffering,’’ he said.
Nicol called on the contractor handling the rehabilitation of the access roads to Apapa port to expedite action to reduce problems encountered by shippers and truck owners.
“Industrialists are incurring huge expenses on haulage due to lack of access roads and they are counting more losses daily.
There is no entry into Lagos ports and no access out of the ports after loading,’’ the shipper said, adding that truck drivers remained on queue for several days.
He, however, commended Dangote Group, Flour Mills of Nigeria Plc and Nigerian Ports Authority (NPA) for their assistance in rehabilitating access roads to Apapa ports.
“It should be noted that they (Dangote and Flour Mills) are industrialists going the extra mile to keep the maritime industry afloat,’’ the shippers said.
Nicol said that the export initiative of the Federal Government was also under threat as export goods spent several days before arriving at the ports.
To avert congestion, he suggested that the backlog of goods at the ports should be cleared.
According to him, the port congestion of the past is mounting again and may lead to prolonged litigation on who pays the charges.
Nicol advised that empty containers inside the ports should be exported as a priority.
He, however, said that the association would not subscribe to the idea of moving containers released at the ports to Papalanto in Ogun.
“The cost of moving such boxes (containers) to factories in Lagos and other places will be too high.
“Cargo taken to Papalanto will be treated as up-country cargo and will attract high haulage fees,’’ Nicol said.
Naira down marginally as CBN injects $210m - VANGUARD
The indicative exchange rate for the I & E Window, known as Nigerian Autonomous Foreign Exchange, NAFEX, depreciated by 2 kobo to N360.42 per dollar, from N360.40 per dollar at the close of the market last week. Meanwhile, the volume of dollars traded in the window yesterday stood at $346.36 million.
Meantime, in a bid to boost liquidity and trade, the CBN injected $210 million into the interbank market. Confirming the intervention, Acting Director, Corporate Communications, CBN, Mr. Isaac Okorafor, said that, “the CBN offered the total sum of $100million to the wholesale segment, while the Small and Medium Enterprises segment received the sum of $55 million. The invisibles segment, comprising tuition fees, medical payments and Basic Travel Allowance (BTA), among others, also received an allocation of $55 million.”
Read more at: https://www.vanguardngr.com/2017/11/naira-marginally-cbn-injects-210m/
Naira sells at N362.5 per dollar at parallel market - PUNCH
The Naira on Tuesday traded at N362.5 to the dollar at the parallel market.
Meanwhile, the Pound Sterling and the Euro closed at N476 and N426 respectively.
At the Bureau De Change window, the Naira flattened at N362 to the dollar, while the Pound Sterling and the Euro closed at N476 and N426 respectively.
Trading at the interbank window saw the Naira closed at N359.87, while the CBN rate closed at N305.9 to the dollar.
Traders said that patronage at the market was slow as they awaited the outcome of the Monetary Policy Committee meeting of the CBN.
Meanwhile, Mr Godwin Emefiele, the Central Bank of Nigeria’s Governor, noted that the investors and exports window had maintained a positive influence in the foreign exchange market
Emefiele said at the end of the MPC meeting that the window transacted more than $18.7bn since it commenced transaction in April.
He added that the Naira had remained stable at the parallel market, while the investors ’window had boosted confidence in the economy.
The MPC meeting of the CBN retained the benchmark interest rate at 14 per cent alongside other monetary policy parameters.
The CBN had injected$ 210m into the foreign exchange market on Monday to boost liquidity.
The series of interventions by the apex bank at the nation’s foreign exchange market had been critical in defending the Naira against the antics of currency speculators.