by Despite US equity investors’ exuberance over bouncing crude oil prices, the world’s crude producers continue to suffer and while Venezuela is in the headlines every day (having already collapsed into chaos), Nigeria appears the nearest to that abyss next. Having urged investors “don’t panic” last year, and seeing dollar reserves drying up rapidly earlier this year, recent “lies” about the nation’s statistics have raised fears of a looming devaluation as FX forwards have crashed to 291 Naira to the dollar (current peg is 199). As Bloomberg notes, traders boosted bets Nigeria’s currency will tumble after policy makers said they would allow greater flexibility in the foreign-exchange market. Rates on three-month naira-dollar forward contracts jumped 20 percent to a record 297 per dollar, suggesting investors see the currency close to that level at the end of the period. The central bank has pegged the naira at 197-199 since March 2015 amid a plunge in oil prices that contributed to the economy contracting in the first quarter.
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Despite US equity investors’ exuberance over bouncing crude oil prices, the world’s crude producers continue to suffer and while Venezuela is in the headlines every day (having already collapsed into chaos), Nigeria appears the nearest to that abyss next. Having urged investors “don’t panic” last year, and seeing dollar reserves drying up rapidly earlier this year, recent “lies” about the nation’s statistics have raised fears of a looming devaluation as FX forwards have crashed to 291 Naira to the dollar (current peg is 199).
As Bloomberg notes, traders boosted bets Nigeria’s currency will tumble after policy makers said they would allow greater flexibility in the foreign-exchange market.
Rates on three-month naira-dollar forward contracts jumped 20 percent to a record 297 per dollar, suggesting investors see the currency close to that level at the end of the period.
The central bank has pegged the naira at 197-199 since March 2015 amid a plunge in oil prices that contributed to the economy contracting in the first quarter.
In early May, officials began a “policy review” suggesting a devlauation possible and then a week ago the central bank voted for “more flexibility in exchange rate” dynamics…
Naira Spot, Naira 3m ForwardsThe result – a collapse in 3m Naira forwards to a record low implying a 50% devaluation from the official peg |
Naira Spot, Naira 3m Forwards (inv) |
As we previously warned, defending one’s currency is a losing game as not only Argentina most recently, but the Swiss National Bank most infamously, will admit.
“As African central banks place restrictions on access to their dollars, while burning through these reserves to support their currencies, they are also storing up longer-term troubles. “Few investors will want to put money into a country at an official exchange rate that is not set by the market and which is not seen as sustainable in the long run,“ said Charles Robertson, global chief economist at investment bank Renaissance Capital.”
For now Africa has avoided the “hyperinflation monster”, the result of an all too predictable scarcity of dollars, however the countdown is on and with every passing day that oil prices do not rebound, the inevitability of a full-on continental currency collapse, with hyperinflation and social unrest to follow, becomes increasingly more likely.
Worse, Africa is just the start: while the manifestations will differ, the mechanics of the dollar shortage, which we recently quantified in the trillions of dollars, are universal, and should the Fed’s rate divergence path with the rest of the world continue pushing the USD ever higher, soon this USD-shortage will escape the confines of the world’s poorest continent and make landfall somewhere where it will be far more difficult to ignore the adverse consequences of the global commodity collapse and the Fed’s monetary policy.
USDSAR Spot (inv), USDSAR 12m ForwardsFinally, we note that Saudi Riyal forwards have started to crack lower also… which would indeed be a black swan event… |
USDSAR Spot (inv), USDSAR 12m Forwards (inv) |