FX: Parallel Market Rate Hits Resistance Level - Analysts

FX: Parallel Market Rate Hits Resistance Level – Analysts

Analysts at Chapel Hill Denham have said it appears that exchange rate has hit resistance level in the parallel market.

Tracking the movement analysts said last week, the naira closed flat across all segments of the FX market.

The rate was unchanged at 386.00 and 475.00 in the investors and exporters window (IEW) and parallel market, respectively.

The official and SMIS rates were also unchanged at 381 and 380.69 respectively.

Chapel Hill noted that FX Liquidity remained weak in the IEW, as average daily turnover fell by 52% wow to US$24mn, also below Q1-2020 level of US$345 million.

“Exchange rate has remained stable in the parallel market at 475 for close to three weeks, which is coincidentally the upper bound of our year-end target range of 450 – 475.

Even as parallel market rate appears to have hit a resistance, the FX liquidity crunch in the more robust mainstream markets is far from over, as banks have continued to reduce debit cards transaction limits for foreign currency purchases“, analysts said.

Chapel Hill stated that dollar-naira 12 outright offshore NDF rate is priced at 455, which implies a future spot rate of 420 to 435, adjusting for interest rates differential.

In the note, Chapel Hill said bonds were back in favour last week, mainly due to bargain hunting on elevated yields at the long end of the curve.

However, the strong duration play was not enough to offset the upward repricing of yields at the short end of the curve.

Hence, the benchmark bond yield curve flattened, and expanded by 17bps wow to 7.71%.

Analysts said interbank funding pressures were benign for most of the week, before funding rates spiked on Friday due to provisioning for the retail FX auction.

Nonetheless, front end rates continued to trade bullish, as the OMO and NTB benchmark curve compressed by 15bps and 11bps to 3.90% and 1.92% respectively.

The investment stated that the primary market was active last week.

The DMO held the scheduled rollover Nigerian Treasury Bills (NTB) and savings bond auctions, while the CBN also floated an open market operations (OMO) auction for the first time in close to two months.

At the NTB auction, demand was strong as bid-cover ratio increased to 2.1x from 1.8x at the last auction.

The DMO allotted the amount offered (N56.78bn in total) across tenors: N19.78bn of 91-day, N10bn of 182-day, and N27bn of 364-day bills.

Stop rates also compressed by an average of 10bps to 1.93%.

Read Also: Pressure Eased on Interbank Rates Day after CRR Debits

The 182-day and 364-day tenors cleared lower by 11bps and 20bps to 1.39% and 3.20% respectively, while the 91-day was flat at 1.2%.FX: Parallel Market Rate Hits Resistance Level - Analysts

On Thursday, the CBN floated an OMO auction to partly rollover maturing bills (N87.97bn).

The CBN offered N50bn but subscription was strong at N94.4bn (bid-cover ratio of 1.9x), while the Bank sold N45.4bn: N5.6bn of 103-day, N9.8bn of 173-day, and N30bn of 362-day bills.

Stop rates compressed by an average of 4bps to 7.2%, as the 103-day tenor cleared lower at 4.92% (-3bps), 173-day at 7.74% (-5bps), and 362-day at 8.94% (-5bps).

This week, investors’ attention will be focused on the bond auction holding on Wednesday“, Chapel Hill said.

The DMO is scheduled to offer N150bn: N25bn of JAN 2026, N40bn of MAR 2035, N45bn of JUL 2045, and N40bn of MAR 2050.

The last auction cleared at 6.0%, 9.5%, 9.8% and 9.95% respectively.

Given the large upcoming OMO maturity on Thursday (N181.4bn), analysts said odds are in favour of another well-bid primary market auction (PMA).

As a result, analysts said they expect bullish sentiments to continue to prevail in the secondary market.

Despite the expectation of further uptick in inflation rate, we maintain our view that we are unlikely to see yields bottom out until October 2020, when the regime change in the OMO market fully sets in“, Chapel Hill stated.

FX: Parallel Market Rate Hits Resistance Level – Analysts

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