cSupply Gap Widens in Forex Market



By Obinna Chima

The naira depreciated against the US dollar at all the foreign exchange market segments last week as dollar liquidity remained tight at the interbank market.

On the interbank market, the naira fell against the greenback by N13.18 to close at N321.16 to a dollar last Friday, as against the N307.98 to a dollar it attained the preceding Friday, amid strain in dollar supply as the Central Bank of Nigeria (CBN) did not intervene in the market. The naira even fell as low as N330/$1 during the week.

Meanwhile, the CBN settled N962.23million in matured 1-month futures contract, being total settlement amount to its banking counterparties at N279/USD last Wednesday.

The expired contract, according to analysts at Cowry Asset Management Limited, was replaced by a new one year contract, Naira-Dollar JUL 19 2017, with a total notional amount on offer of $1 billion at N250/$1.

Forex traders were said to have executed 51 deals worth $189.37million between last Monday and Thursday.

On the other hand, the naira also depreciated at the Bureaux De Change (BDC) and the parallel market arms of the market by 1.37 per cent and 0.80 per cent to N370/$1 and N378/$1 respectively as unmet dollar demand continued to spill into the alternative market segments.

“We are worried that the increasing gap between the interbank market rate and the parallel market rates may create arbitrage and round tripping opportunities. In the current week, we expect sustained pressure on the naira as the greenback remains in short supply,” Cowry Asset Management Limited stated in a report.

The CBN last Tuesday raised the Monetary Policy Rate (MPR), otherwise known as interest rate, by 200 basis points to 14 per cent from 12 per cent. It had also assured Nigerians of the stability of the banking sector, saying whilst it was poised to deal ruthlessly with any misdemeanour and malpractice, the recent removal of some banks chiefs was not a sign of distress.

The central bank also left the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) unchanged at 22.50 per cent and 30 per cent respectively as well as retained the Asymmetric Window at +200 and -500 basis points around the MPR.

CBN Governor, Godwin Emefiele, said five members voted to raise the MPR while three others voted to retain the rate at 12 per cent.

The governor, who admitted the difficulty among members in arriving at a decision over the MPR said it eventually settled for a hike given that the CBN “lacked the instruments required to directly jumpstart growth, and being mindful not to calibrate its instruments in such a manner as to undermine its primary mandate and financial system stability, in assessment of the relevant issues.”

Emefiele further explained that the committee had considered the high inflationary trend which has culminated into negative real interest rates in the economy, a condition which according to him discouraged savings. He added that the negative real interest rates did not support the recent flexible foreign exchange market as foreign investors attitude had remained

To analysts at CSL Stockbrokers Limited, the MPC decision last week was driven, to a large extent, by a desire to move market interest rates higher, in a bid to attract foreign portfolio flows to the fixed income market in order to improve the supply of foreign exchange.  They revealed that since the MPC meeting, yields have moved higher still with FMDQ quoting the secondary market yields for 12-month instruments at 24 per cent on July 27 with 6-month instruments at 17.9 per cent00.

“Indeed, foreign portfolio investors will likely be reluctant to enter the market if they believe that there is further downside for the currency ahead.  The only impediment now for foreign bond investors, we believe, might be concerns about liquidity on the forex market.

“In other words, if they bring money in now, will they be able to buy dollars to exit the market when they wish to do so? Again, we believe that recent depreciation has taken the market closer to a level where suppliers of dollars will be more willing to sell and therefore, we believe that interbank liquidity should start to improve,” CSL Stockbrokers Limited added.

Also, the Chief Economist for Africa at Standard Chartered Bank, Razia Khan, noted that given the cost-push nature of inflation in Nigeria, which largely stems from the shortage of FX, the MPC decision was the right thing.

“It demonstrates a commitment to FX liberalisation, which alone will undo some of the bottlenecks that have contributed to inflation.  While the CBN framed its internal debate as choosing between growth and inflation, we believe there is no meaningful long-term trade off.  Establishing more credible policy  and attracting greater inflows is about as pro-growth as policy can be, given the challenges currently facing the Nigerian economy.  The tightening was an important step in re-establishing the credibility of monetary policy in Nigeria, and should allow for a gradual recovery in FX inflows,” she added.

Commenting on the decision to keep the CRR unchanged at 22.5 per cent, the economist also noted that given weak oil prices and output, she does not see excessive liquidity growth in the Nigerian economy.

“There’s no immediate rationale for a much higher CRR, not least because a more market-determined, inevitably higher USD- NGN rate will keep the spotlight on bank NPLs and capital adequacy ratios.  Any further rise in the CRR would only have added pressure to the banking system, with little effect on alleviating the FX shortage.

“In all, we think this was a good outcome to the MPC meeting.  As Nigeria embarks upon the path of reform (FX liberalisation, fuel price deregulation, transparency initiatives, efforts to boost revenue mobilisation, power sector reforms), all with a view to easing the economy’s transition to lower oil prices, and creating the foundation for more sound long-term growth, we think that today’s MPC decision represented an important initial step in the right direction,” she added.

Interbank Naira Market

The Nigerian interbank money market decreased following easing of liquidity conditions. The central bank auctioned 288-day  treasury bills worth  N87.66 billion  at  18 percent  stop  rate  via  Open Market Operations (OMO) in order to mop up liquidity following   inflows   worth   N156.99   billion   in  matured  205- day  treasury  bills. Consequently, the   net   inflows   resulted   in   moderation   in interbank    lending   rates    across    all    tenor  buckets. Specifically, the Nigerian Interbank Offered Rates (NIBOR) for overnight funds, 1-month, 3-months and 6-month declined to 4.56 per cent (from 20.17 per cent),  15.36 per cent  (from  17.99 per cent),  17.17 per cent  (from 19.28 per cent)  and  19.47 per cent  (from  21.19 per cent)  respectively.

This week, the CBN will auction treasury bills worth N245.18 billion on Wednesday, 03 August; viz: 91-day bills worth N45.18 billion; 182-day bills worth N80 billion; 364-day bills worth N120 billion. “We expect their marginal rates to remain high in line with inflationary trend.  We also anticipate increase in interbank lending rates on anticipated strain in financial system liquidity,” analysts at Cowry Asset Management Limited predicted.

 Bond Market

The OTC FGN bond market witnessed sustained  sell pressure last week, resulting   in   higher   bond   yields across all maturities.  The 20 year,  10.00%  FGN  JUL   2030   debt   lost   N0.32   (yield  increased  to  15.36%);  10-year,  16.39%  FGN JAN  2022  paper  shed  N1.03  (yield  rose  to  15.19%); the 7(year, 16.00% FGN JUN 2019  fell  by  N0.40  (yield  increased  to  15.51%);  while  5(year,  15.10%  FGN  APR 2017  paper  shed N2.53 (yield rose to 19.39%).

On the London Stock Exchange, traded FGN Eurobonds depreciated on  sustained sell pressure – the 10(year, 6.75% FGN JAN 2021 paper;  the 5(year, 5.13% JUL 12, 2018 bond;  and the 10(year, 6.38% JUL 12, 2023 bond lost USD1.54 (yield rose to  6.53%), USD0.49 (yield increased to  4.63%)  and  USD1.53  (yield  climbed  to  6.73%) respectively.

Analysts anticipate sustained bear movement at the OTC market, resulting in increase in bond yields against the backdrop of expected strain in financial system liquidity amid investors switch to money market treasury auctions.