Naira, PMI’s and Inflation in focus

By Lukman Otunuga

The past few weeks have not been kind to the Naira.

Foreign exchange shortages, rising inflation, and lower oil prices offered nothing but pain to the emerging market currency. Losses were accelerated by demand for foreign exchange currency’s outweighing any additional inflows from exporters. According to Bloomberg, the Naira spot rate is down over 4% against the dollar today, trading around N393.33 while on the parallel markets, the Naira has weakened to N480.

Given the list of negative themes threatening to sabotage Nigeria’s economic recovery, the outlook for the Naira remains clouded by uncertainty. According to Bloomberg estimates, prices are seen falling as much as 10% in 2021. Although authorities have threatened to halt the banking services of exporters in an effort to boost supplies of foreign exchange, the local currency remains under the mercy of multiple exchange rates and untamed inflation. The latest rise in the country’s short-term debt and a weaker Naira rate to sell Dollars to investors are likely to raise expectations around another devaluation, marking the third one in less than 12 months.

On the data front, all eyes will be on the manufacturing and non-manufacturing PMI figures for January. The Central Bank of Nigeria composite PMI for the manufacturing sector edged down to 49.6 in December of 2020 with markets forecasting a slight dip in January. For the non-manufacturing, the PMI is seen decreasing to 45.0 after hitting 45.7 in December. While these economic reports are significant and may offer insight into the health of Africa’s largest economy, all eyes will be on the OPEC monthly report and latest inflation figures.

Oil prices hit $60 per barrel this morning, levels not seen since February 2020. The commodity is deriving strength from renewed US fiscal hopes and optimism around global economic growth stimulating demand. The OPEC monthly report on Thursday could provide fresh insight into oils outlook, especially If the report signals a faster recovery in global demand. Given how a handsome chunk of Nigeria’s foreign exchange earnings and government revenues are sourced from oil sales, such an outcome may boost investor sentiment towards the country.

Let’s not forget about inflation. Inflationary pressures remain a thorn in the Central Bank of Nigeria’s side. In fact, untamed inflation has forced the central bank to leave interest rates unchanged at 11.5%. Consumer prices soared for a 16th straight month to 15.75% in December of 2020 – its highest rate since November 2017. Although the country’s borders have been re-opened to trade, inflation is still forecast to surpass 16% in January 2021.

Outside of Nigeria, it will be another busy week for global markets with earnings from the likes of Twitter, Uber & Disney, economic data from major economies and speeches by financial heavyweights in focus.