Traders’ Voice…Global Monetary Commentary

Naira Gains against the USD at the Bureau De Change, Parallel (“black”) Markets Brandspurng
Afolabi Sotunde Illustration Naira

“For there is always light if only we’re brave enough to see it if only we’re brave enough to be it.”……Amanda Gorman

The sole objective of the monetary authorities of every country is to make policies to achieve price stability by ensuring a stable rise in GDP, keeping the unemployment rate low, and maintaining inflation and foreign exchange rates in a predictable range.

The year 2020 took the global economy by surprise and left all the monetary authorities of each country scrambling to create and implement policies that would help reduce the negative impact of the Covid-19 pandemic on its economy.

Most central banks adopted a dovish stance, in a bid to support a fast-dwindling economy, whilst some like that of Nigeria, who adopted a dovish stance as well, used unorthodox means to try to achieve price stability.

As we approach the end of the first month of the new year, the world’s hope for a faster recovery remains threatened by the continued spread of the Covid-19 virus with news of new strains emerging (smile at your screen if you cannot wait for this thing to be over).

Nevertheless, we are hopeful and optimistic as various countries have begun vaccination on their citizens. However, it is that time of the year again where all eyes will be on the global monetary authorities to set the tone for the direction of the global economy this year (May the Almighty God help them).

With the resurgence in the Covid-19 virus, vaccine hopes, and concerns of a second lockdown restriction, the key question remains, “do they Cut, Hike, or Hold rates?” 

Maintaining a Dovish Stance… 

Toward the end of the year 2020, The U.S Federal Reserve officials renewed their “wedding vows” to the market as they signalled that interest rates would stay at their current near-zero level until at least 2023. With the Fed’s January meeting coming up this week, we anticipate no change in interest-rate policy or the pace of asset purchase (QE).

US FED FUND RATE (5-Year Trend)

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Global central banks are still keen on supporting the fragile growth trajectory. The global economy has been on over the last three years as the ECB also maintained its dovish stance last week, leaving the policy rate unchanged and promise to continue to buy up to EUR1.85 trillion ($2.25 trillion) of eurozone bonds through March 2022 under a plan unveiled in December.

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We expect this new round of global monetary easing to have a positive impact on emerging markets with good fundamentals and attractive yields, barring any negative idiosyncratic factors.

Angola Yield Curve

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Nigeria Yield Curve

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Curbing Inflation or Supporting the Economy? 

The Nigerian monetary policy committee is set to announce the first monetary stance for the year 2021. The question is, “which of the macroeconomic headwinds will the monetary authority be looking to address, spiralling inflation that led to price instability or the Covid-19 economic disruption?”

The Central Bank of Nigeria left its monetary policy rate unchanged at 11.5% during its November meeting. The decision reflected the priority to further stimulate a contracting economy despite quickening inflation, which has remained above the Bank’s target range for over five years now.

MPR (5-Year Trend)

Based on the body language of the committee, we expect the MPC to remain focused on the growth trajectory of the economy, as it has stated in its past meetings that the spiralling inflation is largely structural, with bottlenecks amplified by the pandemic and efforts to manage the exchange rate. 

Scenario Plays…

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Scenario 1: The MPC decides we need more cuts as they believe this will further boost production and support economic growth. This will ease the bearish sentiment in the fixed income market and renew the buying interest in the equities market.

Scenario 2: They decide to play the waiting game and watch all measures taken last year continue to run its cause. This will have no significant impact on the market as fixed-income yields will continue its upward trend and buy an interest in the equities will be tied to how long the low yields will last.

Scenario 3: They decide enough is enough and increase interest rates with the hope of curbing inflation and attracting FPIs back into the fixed income market. This will lead to a knee-jerk reaction in both the equities and fixed income market.