Higher US interest rates burn through Nigeria’s reserves

Defending the Nigerian Naira against the mighty Dollar has come at a steep price to the central bank of Nigeria in the form of falling reserves.

Nigeria’s foreign exchange reserves have declined by roughly $2.1 billion in the last 30 days thanks to a broadly stronger Dollar and prospects of higher US interest rates.

With the Fed expected to raise interest rates again in December, reserves are seen falling even further on the widening interest rate differentials between both central banks.

If the oil bull rally sputters and government revenues in Nigeria end up thinning, protecting the Naira could become increasingly complicated and strenuous for the central bank

Week ahead: Italian budget, ECB meeting & US GDP in focus

Asian shares were mostly higher this morning as Chinese indexes rallied more than 4% on verbal support from the country’s top officials.

Although the positive momentum from Asia has seeped into European markets, gains remain threatened by fragile risk sentiment. With investors bombarded by geopolitical factors such as trade tensions, Italy’s budget woes and Brexit-related uncertainty, caution is set to prevail this week. Global equity bulls still have an opportunity to re-enter the scene on the back of robust corporate earnings. However, expectations of higher US interest rates, global growth fears and geopolitical tensions all present downside risks to equity markets across the world.

Trade tensions sizzle in the background

US-China trade developments were back in focus following reports of White House economic advisor Larry Kudlow accusing Beijing of doing “nothing” to ease trade disputes ahead of a G20 meeting in Argentina next month.

This development has not only reduced optimism over the United States and China finding a middle ground on trade but raised prospects of the US next year boosting the tariffs on $200 billion of Chinese imports from 10% to 25%.

With a full-blown trade war between the world’s two largest economies presenting a significant threat to global growth and stability, sentiment is poised to remain fragile.

Markets eye Italy budget

Italy’s budget woes with the European Union enters a critical phase today as Rome faces a noon deadline to explain why it is in breach of EU fiscal rules. With the Italian government bracing for the EU to reject its 2019 budget on Tuesday, the Euro is likely to take a hit. Uncertainty in Italy remains one the major geopolitical factors weighing on global sentiment and denting investor confidence.

ECB meeting on Euro’s radar

All eyes will be on this week’s European Central Bank meeting which is expected to conclude with monetary policy left unchanged.

With no rate moves expected, investors should not be quick to label this meeting as a non-event. Given the growing uncertainty revolving around the political situation in Italy, there will be an extra focus on Mario Draghi’s press conference. It will be interesting to hear Draghi’s thoughts on the developments in Italy and possible impacts they may have on the Eurozone economy. If the central bank head strikes a cautious and dovish tone, the Euro will most likely depreciate.

Taking a look at the technical picture, the EURUSD is trading back above the 1.1520 level this morning on the back of Dollar weakness. Intraday bulls could push the currency pair towards 1.1580 in the near term.

Focus on US Q3 GDP growth

The main event risk in the United States this week will be the first reading of third quarter GDP data scheduled for release on Friday. US economic growth is expected to have expanded 3.3% during the third quarter of 2018, slower than the 4.2% achieved in Q2.

An upside surprise on GDP growth has the potential to boost buying sentiment towards the Dollar and reinforce market expectations of higher US interest rates.