Firm Says CBN Will Devalue Naira at IEW to Unlock FX Liquidity
CSL Stockbrokers Limited has forecasted the Central Bank of Nigeria (CBN) will devalue the foreign exchange rate at the Investors and Exporters Window (IEW) at a range of 5- 7% before year-end to unlock foreign currency liquidity.
The firm said this in reaction to the monetary policy committee (MPC) decision to keep policy rates steady amidst inflation, and foreign exchange pressure.
At the just concluded meeting, the CBN remained unfazed by rising inflation rate which has more than twice its 6-9% target while foreign investors remain sideline due to unattractive yield in the fixed income space.
“In our view, the decision seems reasonable, as the CBN remains squeezed between the necessity to sustain the real economy, as growth remains fragile and to curb elevated inflation, which remains well above the CBN’s target of 6%-9%.”, CSL Stockbrokers said
Analysts said therefore, hiking rates, in recognition of increased upside risk to prices and mounting external sector pressures would further constrain economic growth, while a rate cut is likely to intensify inflationary pressures and amplify the currency risk.
Return on fixed interest securities have been negative due to consistent increase in headline inflation rate for 19 months driven by food price index.
Market Impact
Explaining the impact of the monetary policy decision on key rates, CSL Stockbrokers said the outcome of the MPC meeting is unlikely to result in any fundamental change in the fixed income market.
“We expect sentiments to remain bearish, as the negative real return, successive rate hikes at auctions and elevated fiscal deficit strengthen the case for sustained yield increase in the near term. As such, we think the steepening of the Naira yield curve will persist”, analysts explained.
On the stock market, CSL Stockbrokers said domestic investors have been selling down their equity holdings in response to the rising yields in the fixed income market.
“We do not expect any change in the recent trading pattern considering investors do not expect a reversal in the uptick in yields. In our view, trading in the market will remain choppy as investors’ cherry-pick fundamentally sound stocks.” analysts added.
However, analysts at CSL Stockbrokers projects the economy will grow by 2.3% in Q2-2021. On the flip side, analysts forecast month-on-month headline inflation of 1.16% in May, which translates to a year-on-year reading of 18.10%, as against 18.12% reported in April.
It said the CBN has finally adopted the Investors and Exporters window rate as the new official exchange rate for the country.
“This should help simplify Nigeria’s intricate foreign exchange (FX) regime and provide a slight boost to the government’s oil revenue.
Looking ahead, CSL Stockbrokers forecast the CBN will likely devalue the Investors and Exporters rate by about 5-7% by year-end to unlock FX liquidity, attract new FPI flows and curb the current account imbalances, which is projected to reach US$10.80 billion (2.1% of the GDP) in 2021.
Firm Says CBN Will Devalue Naira at IEW to Unlock FX Liquidity
