CBN Attains Convergence around Multiple Foreign Exchange Rates
CBN Governor, Godwin Emefiele

CBN Attains Convergence around Multiple Foreign Exchange Rates

The Central Bank of Nigeria has achieved convergence around its multiple foreign exchange rate, adjust rate on its website and FMDQ platform.

Apex bank adjusted the USD/NGN official FX rate on its website by 5.3% to 380 from 361.

Chapel Hill Denham stated that this happened a month after it first adjusted the official quote on the FMDQ exchange to 381 from 361.

Primary market activity resumes with a rollover Nigerian Treasury Bill auction. The Debt Management Office (DMO) is set to offer N56.8bn across three tenors: N19.78bn for 91-day, N10bn for 182-day, and N27bn for 364-day.

Analysts noted that the previous auction cleared at 1.2%, 1.5% and 3.4% respectively.

“Funding pressures should remain minimal this week, considering an OMO maturity (N87.8bn) is expected on Thursday”, analysts stated.

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However, Chapel Hill said given the relatively low level of open market operations (OMO) maturity, the CBN is unlikely to float an auction to rollover maturing bills.

After a four-month hiatus, the DMO is set to resume the monthly FGN Savings bond offer this month, with the offering scheduled to open on Monday, August 10 and close on Friday, August 14.

“A major question for bond investors, is whether the spike in bond yields last week is a temporary short-term blip, or the beginning of the much anticipated correction.

“In our view, given the peculiar nature of the repricing, we do not think we have reached the peak of the bond rally yet.

“Over the next three months, liquidity will likely remain a key driver of rates, given large OMO maturities and bond coupon payments.

“In our view, to effectively call the peak of the bond rally, three factors will be important.

“FX flexibility by the CBN, and subsequent liquidity tightening to defend the adjusted peg, regime change in the OMO market from November, after non-bank local investors fully exhaust their OMO holdings, and deficit financing pressures from 2021”, Chapel Hill said.

Last week, the local currency, Naira, strengthened against the dollar by 0.84% or N3.25 in the Investors & Exporters Window (IEW) to close at 386.00, but closed flat in the parallel market at 475.

Liquidity remained thin in IEW, as about US$50mn changed hands daily on average, compared to Q1-2020 average level of US$345 million.

“The CBN took an important positive step to affirm its commitment to FX rate convergence last week, after it tacitly confirmed the status of the official FX rate”, analysts explained.

Chapel Hill recalled that on Wednesday, August 5, the CBN adjusted the USD/NGN official FX rate on its website by 5.3% to 380 from 361.

CBN Attains Convergence around Multiple Foreign Exchange Rates
CBN Governor, Godwin Emefiele

Having achieved the objective of converging the multiple FX windows around IEW rate, Chapel Hill said the next steps required to truly unlock liquidity in the FX market.

Analysts said CBN should allow for more flexibility in the pricing of the FX rate in IEW.

The firm advised resumption of intervention sale in the IEW, and scaling up of wholesale FX auctions to clear the backlog of FX demand.

“The market expects further devaluation, with the offshore NDF 12M USD/NGN rate at 460 (including interest rate differential)”, Chapel Hill stated.

Also, analysts said the Bull Run in the Nigerian local fixed income market grounded to a halt last week, as PFAs sold down on bonds to generate liquidity for refunding MDAs.

Bid-ask spread widened at the start of the week due to the uncertainty, before narrowing towards Friday.

Overall, average yield across the benchmark bond curve expanded by 75 basis points (bps) week on week to 7.53%, with the long end of the curve retracing higher back to double digits, up +116bps to 10.32% week on week.

In the money market, interbank funding rates began the week at double digits, on the bank of CRR debits and retail FX auction the previous week.

However, funding pressures eased subsequently, while funding rates declined to mid-single digits on Friday.

Consequently, short term securities remained upbeat, with the benchmark OMO curve compressing by an average of 17bps to 4.06%, while the Nigerian Treasury Bills curve was unchanged at an average of 2.04%.

CBN Attains Convergence around Multiple Foreign Exchange Rates