Foreign Exchange Liquidity Remains Weak as CBN Plays Ostrich

Foreign Exchange Liquidity Remains Weak as CBN Plays Ostrich

The Nigeria’s local currency, Naira, remained under pressure last week. In the I&E Window, the foreign exchange rate weakened by 0.3% wow or $1 to N389.50.

Chapel Hill Denham expressed that liquidity remains weak as the Central Bank of Nigeria (CBN) continues to play ostrich.

Similarly, the Naira weakened by N2.0 or 0.4% wow to N472 in the parallel market.

The official and SMIS rates were unchanged at N381 and N380.69 respectively, based on data from FMDQ data, although the CBN quoted the official rate at N360 on its website.

Chapel Hill Denham said the monetary policy committee (MPC) meeting last week was a non-event with respect to the FX market.

However, analysts said the CBN gave no guidance on when it would resume intervention in the I&E Window and BDC segment, nor was there any clarification on the CBN’s position regarding the status of the official rate.

“While the CBN continues to play otrich, liquidity has remained weak in the FX market, in the absence of CBN support and weak portfolio capital inflows.

“Average daily turnover in the I&E window fell by 34% wow to US$27.4 million last week, also significantly below US$345 million in Q1-2020.

In a related development, Chapel Hill Denham said the rally in the Nigerian local fixed income market reached a new depth last week as the entire yield curve fell to single digits for the first time in a decade.

The catalyst for the sizeable repricing of bond yields was the outcome of the July bond auction, in which marginal rates closed within single digits due to substantial demand by investors, against relatively low supply by the Debt Management Office (DMO).

On a week-on-week basis, the benchmark bond yield curve compressed by 51bps to 6.76% from 7.28%.

Chapel Hill Denham analysts said at the front of the curve, short term rates also moderated, thanks to surplus liquidity in the financial system.

This came on the back of the open market operations (OMO) maturity in the previous week, and three bond coupon payments that came in the week, estimated at about N133 billion.

At the first bond auction of the quarter that held last Wednesday, investor demand was strong as subscription level reached N470 billion compared to N130 billion on offer (3.6 bid-cover ratio).

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Consequently, the DMO allotted N177 billion, while marginal rates settled at single digits across the four tenors on offered.

The tenor include N25bn of JAN 2026 at 5.99%, N42bn of MAR 2035 at 9.49% (-151bps compared to June), N75bn of JUL 2045 at 9.70%, and N35bn of MAR 2050 at 9.90% (-225bps compared to June).

“In line with expectation, the MPC voted to maintain status quo on all policy parameters at the MPC meeting which held on Monday 20th July 2020.

“Although the MPC’s decision did not come as a surprise, the level of uncertainty remains high, as key issues regarding FX liquidity and rising inflation are yet to be addressed”, Chapel Hill Denham.

Expressing their views, analyst said the focus of investors has shifted to administrative policies of the Bank, which are usually taken outside of MPC meetings, but with more profound impacts on financial markets.

Barring a cash reserve ratio (CRR) debit by the CBN this week, Chapel Hill Denham said it expects the financial system to remain liquid, due to an additional bond coupon payment.

Also, a rollover Nigerian Treasury Bill auction is scheduled for Wednesday, with the DMO set to offer N269.95 billion across three tenors.

The TBills tenor to be offered include N49.84bn of 91-day, N54.59bn of 182-day, and N161.52bn of 364-day papers.

“The previous auction cleared at 1.30%, 1.80% and 3.35% respectively”, analysts stated.

Foreign Exchange Liquidity Remains Weak as CBN Plays Ostrich