10 September: External influences may impact the Nigerian Naira this week, with investors keeping a very close eye on any further -turmoil with emerging market currencies after a very troublesome past couple of weeks.

The Naira may take some guidance from how investors view emerging markets generally, with particular attention being paid towards how the Lira reacts to the latest Turkish GDP reading and the general threat of further trade tariffs from U.S. President Donald Trump. The indications from early Asian trading that both the Indian Rupee and South African Rand have resumed the week under weakness against the Greenback suggests that buying sentiment towards those currencies belonging to markets with high account deficits remains limited. However, with Nigeria boasting a current account surplus, the Naira may be slightly insulated from the brutal sell-off that has rattled EM currencies.

Asian stocks started the week in negative territory and the dollar traded higher as investors continued to monitor the escalating U.S. trade war with China. President Trump threatened last week that he’s ready to impose tariffs on $267 billion in Chinese goods on top of the proposed $200 billion that may come into effect soon. The total sum would then cover all U.S. imported goods from China, which is definitely not yet priced in the financial markets.

U.S. equity investors who have ignored the selloff in emerging market assets over the past couple of months started looking a bit shaky last week. The S&P 500 ended last week 1% lower, while the Nasdaq composite declined 2.55%. It’s unclear yet whether the contagion effect has started spreading into U.S. assets, but if signs of stress begin to show in U.S. equities, expect to see further steep selloffs in global equity markets. It requires remarkable positive news to sway investors from the ongoing EM troubles and escalating trade tensions - and so far, there isn’t any.

The dollar has become the destination for safe-haven flows amid the escalation of trade tensions, but also supporting the greenback was the recent batch of economic data. The latest ISM data showed manufacturing and service sectors activity grew faster than most optimistic economists’ predictions. Job growth remains robust, but more importantly, wage growth hit a nine-year high in August. The upcoming data this week may also show solid performance for retail sales and consumer inflation. This should further boost expectations for two more rate hikes in 2018, leading to further divergence in monetary policies.

Investors this week will also focus on monetary policy decisions, particularly emerging markets central banks which are aiming to put an end to their currency turmoil. The Turkish central bank will be -front and center on Thursday after policymakers vowed to step in to contain inflationary pressures. I think a rate hike is imminent, but it’s the magnitude of the rate hike that matters now. The central bank needs to push rates to more than 600 basis points to restore investors’ confidence and bring real interest rates into positive territory. Any disappointment here will likely lead to a continued selloff in the Turkish Lira.

The European Central Bank and Bank of England will also be meeting on Thursday, but do not expect a lot of excitement here. ECB President Draghi will likely give reassurance that the ECB bond buying stimulus program will be ending by year’s end. Meanwhile, investors would like to know what the BoE’s views are on the latest Brexit talks. However, both central banks will stand pat on rates.

 Focusing on emerging markets, weakness is set to remain a recurring theme amid global trade tensions, a broadly stronger Dollar and prospects of higher U.S. interest rates. With turmoil in Turkey and Argentina triggering contagion fears, appetite for emerging market assets and currencies is likely to continue diminishing. In the EM currency space, the outlook remains tilted to the downside in the near term, especially for those currencies with high current account deficits.

In the commodity markets, Gold has -again struggled to find any support despite escalating U.S.-China trade tensions denting investor confidence and promoting risk aversion.

The bearish price action witnessed in recent weeks continues to highlight how Gold’s trajectory remains heavily influenced by the Dollar’s performance. With King Dollar spoiled by expectations of higher U.S. interest rates and safe-haven demand, this could mean nothing but pain and misery for zero-yielding Gold. It is worth noting that the Dollar has snatched away a fair chunk of Gold’s safe-haven allure with investors turning to the Dollar in times of uncertainty. Focusing on the technical picture, bears wrested back control after prices secured a weekly close below the $1,200 psychological level. Sustained weakness below this level could encourage a decline towards $1,180.

Source : Hussein Sayed and Lukman Otunuga from FXTM

Reporting for EasyKobo on Monday , 10 September 2018 in Lagos, Nigeria