26 June 2017

Nigeria: Forex Rate Convergence Imminent

THE steady appreciation of the naira in the Nigeria Autonomous Foreign Exchange (NAFEX) window, also known as Investors & Exporters window will persist this week, with the NAFEX rate falling to N360 per dollar. Meanwhile, volume of transactions in the NAFEX window reached $2.5 billion last week from $2.2 billion two weeks ago.

Since it was introduced on April 24 by the Financial Market Dealers Quote (FMDQ) as a reference rate for transactions in the window, the NAFEX rate had been on the downward trend. From a high of N379 per dollar on Friday, April 29, the NAFEX rate declined steadily to N362.16 per dollar at the close of business last week. This translated to N16.84 or 4.4 per cent appreciation of the naira in the NAFEX window.

Last week the naira appreciated by N3.13 at the NAFEX window, as the reference rate dropped from N365.29 per dollar in the previous week to N362.16 at the close of last week. The previous week it appreciated by N7.99 kobo from N373.28 per dollar to N365.29 per cent.

This trend is expected to persist this week, which traders said would take NAFEX rate down to a convergence with the CBN exchange rate for invisibles at N360/USD1. The appreciation of the naira in the NAFEX window is driven by increased confidence buoyed by the daily publication of the exchange rate and volume of transactions by the FMDQ.

According to the FMDQ data, $431 million was traded at the NAFEX window last week, while $466 million was traded the previous week. This indicated that $897 million was traded in the last two weeks.

CBN injects $435m: Meanwhile the CBN sustained its intervention in the foreign exchange market last week as it injected $435 million into the interbank segment. On Monday, the apex bank sold $195m, with $100 million allocated to authorized dealers interbank wholesale window, while $50 million was allocated to the Small and Medium Enterprises (SMEs) window. The invisibles segment was allocated the sum of $45 million to meet the needs of those who applied for forex to settle Business/Personal Travel Allowances, school tuition, and medicals, etc.

On Friday, the CBN allocated $240 million to the Retail Secondary Market Intervention Sales (SMIS) for spot and forward deals. According to the Acting Director, Corporate Communications at the CBN, Mr. Isaac Okorafor, the $240m figure released to the Retail SMIS included deals initiated in the course of the out-going week.

While expressing delight at the stability in the forex market, Mr. Okorafor said the CBN remained very optimistic that its goal of exchange rate convergence is fast becoming a reality, adding that the CBN was committed to ensuring liquidity in the forex market.

Also during the week, the apex bank sold $40,000 to each of the 3,145 bureaux de change (BDCs) across the country. However, the naira depreciated slightly to N367.5 in the parallel market last week. Vanguard survey revealed that the parallel market exchange rate rose from N367 per dollar in the previous week to N367.5 per dollar at the close of the week. This development was attributed to increased demand for dollars towards the end of the week ahead of the two days holiday this week.

N522bn cash inflow pushes down interbank rates

Cost of funds in the interbank money market fell by more than half last week following the inflow of N522 billion into the market. Vanguard analysis revealed that the N522 billion inflow comprised N247.1 billion inflow from matured treasury bills (bills) and N275.2 billion from statutory allocation funds.

Consequently, interest rates on Colateralised lending and Overnight lending fell by 642 basis points and 617 basis points respectively. Interest rate of Colateralised lending fell to 8.75 per cent at the close of business on Friday from 15.17 per cent the previous week, while interest rate on Overnight lending dropped to 9.5 per cent from 15.67 per cent.

Reflecting the impact of the inflow on market liquidity, trading in government securities (treasury bills) as well as the FGN Bond offered during the week recorded oversubscription. While the CBN offered N178 billion worth of bills, investors demanded for N231 billion, indicating 30 per cent oversubscription.

At secondary market, the apex bank offered N45 billion while total subscription stood at N77.4 billion. The apex bank, however, sold N55.2 billion with stop rate ranging from 18 per cent and 18.6 per cent. At the primary market, the CBN offered N133.2 billion while total public subscription stood at N153.7 billion. The apex bank, however, sold N132.8 billion with stop rate ranging from 13.5 per cent to 18.7 per cent.

Also during the week, the N140 billion FGN bond offered by the Debt Management Offer (DMO) recorded 13 per cent oversubscription as investors demanded for N158 billion while the DMO sold N99 billion.

The improved liquidity in the interbank money market is expected to persist this week due to inflow of N236 billion from matured treasury bills. This however might not translate to lower cost of funds as the CBN is expected to issue OMO (open market operation) bills to mop-up the liquidity.

Analysts were, however, divided in their outlook for the market this week. According to analysts at Cowry Assets Management Limited, a Lagos based investment firm, "This week, there will be maturing treasury bills worth N236.118 billion. Hence, we expect financial system liquidity ease and resultant moderation in interbank rates". Analysts at Afrinvest Plc however offered a different opinion. They said: "In the week ahead, we expect the CBN to continue its weekly SMIS sales and OMO mop-ups. The impact of these sales will keep liquidity tight barring any major inflow. Hence, we expect money market rates to trend higher."

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