‘Naira: Weaken FX futures contracts reflect appropriate currency risk’

In the foreign exchange market this week, the Central Bank of Nigeria spot rate traded ₦361 to a dollar, thus remains widen against parallel market rate.

Also, the naira future contract slides above ₦550; which currency traders believe is a reflection of the nation’s currency risk

The 5-year future contract which include APR 2025 slides from ₦413.36 to ₦569.69; MAR 2025 flagged from ₦412.93 to ₦566.16 and FEB 2025 from ₦412.49 to ₦562.64.

In the parallel market, the exchange rate strengthened by ₦5 to close at ₦455 to a dollar in the week.

Meanwhile, in the investors and exporter window, naira gained 5 kobo as it was paired against greenback at ₦387.25 to a dollar.

Analysts stated that activity level declined at I&E Window as turnover fell 24.4% week on week to close at $168.3 million.

In its note, Afrinvest stated that expectations about currency weakening over the medium-term heightened as rates on 5-year contracts depreciated significantly this week.

“This, more appropriately reflects Nigeria’s currency risk”, Afrinvest stated.

Following the reopening of major economies around the world, there has been improved demand for oil.

Consequently, Brent climbed 10.4% to close at $30.03 per barrel.

Therefore, the external exchange balance saw an uptick as it closed 1.1% higher to $33.9 billion as at 4th of May, 2020.

The total value of open contracts at the FMDQ Securities Exchange (SE) FX Futures Contract Market advanced 1.4% or $211.7 to $15.2 billion.

The AUG 2020 instrument at contract price of ₦390.13 received the highest subscription worth $47.93 million which took the total value of the contract to $986.5 million.

The OCTOBER 2020 instrument at contract price of ₦391.08 recorded the least subscription of $0.5 million, increasing the total value of the contract to $1.2 billion.

Afrinvest expects stronger FX demand due to the easing of lockdown across major economies to put pressure on the exchange rate in the near term.

In related development in the money market: open buyback (OBB) and overnight rate (OVN) trend higher despite elevated system liquidity.

System liquidity opened the week robust, albeit lower at ₦441.3 billion from previous close of ₦901.1 billion and OBB and OVN inched higher to 4.0% and 4.7% respectively.

On Tuesday, rates marginally increased to 4.5% and 5.4% as system liquidity decreased to ₦291.8 billion.

On Thursday, system liquidity further fell to ₦266.6 billion with while OBB and OVN declined to 2.0% and 3.0% respectively.

Finally, OBB and OVN rose significantly to 7.4% and 8.3% to close the week as system liquidity rose to ₦505.5 billion.

In the secondary treasury bills market, the performance was bearish as average yield across benchmark tenors trended higher.

It went up 3 basis points (bps) week on week (w/w) to close at 2.8%.

During the week, average yields across instruments was relatively stable across board due to lack of OMO auction as anticipated by the market.

The short-term instrument recorded the most sell-offs as yields advanced 8 bps to 2.5% while the medium-term instrument rose 1 bps to 2.8%.

On the other hand, the long-term instrument closed flat as yield settled at 3.2%.

‘In the coming week, we expect inflows from OMO maturities worth ₦297 billion and we envisage that system liquidity will remain elevated, driving rate lower in the secondary T-Bills market’, Afrinvest stated.

‘Naira: Weaken FX futures contracts reflect appropriate currency risk’

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