Analysts Challenge CBN to Address FX Rates Confusion
Analysts at Chapel Hill Denham Limited have tasked the Central Bank of Nigeria to come clear and state applicable FX rates for official use across segments.
It was observed there various corporate organisations including government ministries were quoting different official exchange rates.
In its note, the investment firm explained that the uncertainty regarding the official FX rate continued through last week, as various platforms quoted different FX rates across market.
Analysts at the firm explained that while the FMDQ quoted the official dollar – naira exchange rate at ₦381, the CBN maintained that the rate is ₦361 on its website.
Further adding to the confusion, Chapel Hill Denham stated that the Ministry of Finance retained ₦360 as the budget assumption for the 2021 – 2023 Medium Term Expenditure Framework (MTEF).
This negates the recent commitment to convergence of the FX rates.
“We think the CBN has to come out with a more coherent message on the status of the official FX rates”, Chapel Hill Denham advised.
It said more importantly, the CBN may have to show more flexibility in the Investors and Exporters window (IEW), and also resume supply, before liquidity can substantially improve.
The naira came under renewed pressures across several segments last week.
The dollar exchange for naira rate weakened by 0.3% week on week in the I&E Window to ₦387, as liquidity fell by 59% week on week to US$37.7 million.
The parallel market rate weakened by 0.86% wow to ₦465, due to renewed scarcity of United States dollars.
At the international level, the USD index weakened against a basket of six major currencies last week, due to better-than-expected economic data, which fanned risk appetite at the start of the week.
At the fixed income market, analysts said sentiments were mixed last week.
Liquidity was tight at the start of the week, as a result of the Cash Reserve Requirement (CRR) debit and retail FX auction the previous week, as well as AMCON charge debit at the start of the week.
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Consequently, interbank funding rates were elevated as Deposit Money Banks (DMBs) turned to the CBN’s Standing Lending Facility (SLF) window to obtain funding, until a CRR refund eased funding pressures on Thursday.
Nonetheless, analysts stated that short term rates climbed, as the benchmark open market operation (OMO) and NTB curve expanded by 56 bps and 10 bps week on week to 5.51% and 2.40%, respectively.
However, the bond market continued to rally, driven by increased interest at the short end and belly of the curve, while investors took profit on some long-dated maturities.
As such, the benchmark bond curve compressed by 23 bps wow to 7.41%.
This week, primary market activity will resume, with a scheduled rollover NTB auction on Wednesday totaled ₦107 billion.
This include ₦5.8 billion on 91-day, ₦26.6 billion on 182-day and ₦74.6 billion on 364-day.
Chapel Hill Denham analysts explained that the previous auction cleared at 1.789%, 1.91% and 3.39% respectively.
Analysts said liquidity pressures are expected to ease this week, thanks to the CRR refund last week.
Also, bond coupon payment of ₦40.7 billion is expected this week, and scheduled OMO maturity on Thursday totaled ₦146.85 billion.
The CBN is expected to float an OMO auction to rollover maturing bills on Thursday. The market will also be anticipating the release of the Q3-2020 bond auction calendar.
“Based on the revised 2020 budget, and primary market activities of the debt office year-to-date, we expect the Debt Management Office (DMO) to supply ₦1.2 trillion worth of securities (net maturities).
“We think this could be easily absorbed without forcing a market repricing of interest rates, given the large amount of OMO maturities in the second half of 2020 amounted to ₦6.4 trillion.
As well as bond coupon payments of about ₦550 billion between July and October.
Analysts Challenge CBN to Address FX Rates Confusion
