Verto's FX Markets in Focus: Insights & Analysis

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Quick Global Weekly Market Update:

UK: With CPI data top of the agenda last week, we saw both headline and core inflation metrics meet forecasts but not exactly exhibiting any significant downward trend like we had seen in the last print. With labour data early in the week and retails sales towards the end both disappointing, it wasn’t the rosiest week for the UK in terms of macro metrics. However GBP fluctuated in a tight range throughout the week, but still three big figures below the recent 1.30+ highs.

A quiet week ahead in terms of data, so we’ll be looking for BOE commentary to give signals about their plans for the upcoming MPC meeting. Hot labour data may have given the BOE little choice but to continue hiking, however they may have some lee-way to ease of the gas in line with the other G10 economies.

USA: Tier Two data didn’t impact the market and macro landscape too much last week, so the main focus was the Fed’s minutes from the last FOMC meeting. Federal Reserve officials struck a tenuous agreement to pause interest-rate increases at their June meeting, all but committing to hike again later this month in a bid to keep fighting stubborn inflation.The minutes show that while almost all officials deemed it “appropriate or acceptable” to keep rates unchanged in a 5% to 5.25% target range, some would have supported a quarter-point increase instead. The minutes also showed that a large majority of policymakers — “almost all” — agreed that more tightening will likely be needed this year. It provided ample evidence that the Fed likely isn’t done.

Another quiet week in terms of data but the core focus will be this week’s Jackson Hole where the FOMC’s Jay Powell will be speaking. The markets will likely hang on every word, so we will expect some volatility after a fairly flat week for USD last week.

EUROZONE:  GDP data printed broadly inline with expectations last week, as did headline CPI, neither reflecting any significant trend lower. However, CPI ex Tobacco did print about 100bps above forecasts which will likely attract the attention of the ECB as they look to the next stage in their tightening cycle.As with the other G3 nations, it’s a quiet week for data this week. But with the ECB’s Lagarde also speaking at Jackson Hole, the market will also be looking for any indication of where the ECB’s tightening cycle will be going next, perhaps shifting towards data dependency.

KENYA: Treasury officials have stated last week that ​​Kenya could achieve a primary surplus this fiscal year, the first in two decades, if it can hit its revenue targets, bringing the fiscal gap to 3.9% of GDP next year from 4.8%. Whilst this will need to be seen to be believed, it’s an important step towards satisfying the IMF’s demands as part of their disbursal agreement.Kenya is also in talks with the World Bank and EU to ramp up its “Hustler Fund” project that’s already providing cheap credit to more than 20 million of the country’s poor. A top government official said the lender was discussing backing that could amount to as much as $139 million, including via an existing program to support small enterprises. Talks with the EU and the US Agency for International Development, another potential backer, are still at an initial stage.

NIGERIA: A very busy week in Nigeria. Acting CBN Governor fired a shot across the bow early in the week, announcing that the CBn would be taking steps to stop “speculators” in the parallel market to narrow the spread to the official rate.It was later announced that the NNPC (Government Oil Subsidiary) had secured a $3bn loan from Afrexim bank for the purposes of stabilising the FX market. Note this loan is being disbursed in tranches, wil repayment in proceeds from future oil sales.The CBN then announced a new Price Verification System those looking to sell NGN through the NFEM/I&E window. Another hurdle to jump for those looking buy USD, plus we saw our own I&E orders being suppressed to a rate of 774, having already been forced to instruct at 799 and then later 788.Finally, the CBN announced that BDC’s would only be permitted to exchange currency within +/- 2.5% of the prevailing NFEM/I&E rate, effectively pegging a new BDC rate and disconnecting it from the “online” parallel market.

The net effect was some significant volatility in the parallel market. Having bounced around 950 with 2-3% intraday swings, we suddenly saw a 10% drop in the rate, where we traded a low of around 820. We’re expecting the volatility to continue this week, but from an overall macro perspective, it really feels like the new administration and the CBN have taken a step backwards in their reform of the FX market.