Investors/Exporters FX Window Records 34% Turnover Drop, Dust Confidence
Investors/Exporters foreign exchange (FX) window recorded more than 34% turnover drop last week, dusted investors confidence as price discovery mechanism according to analysts at Chapel Hill Denham.
The Battle to save the soul of the Nigerian local currency, Naira will continue this week despite foreign exchange scarcity, weak external reserves.
Last week, exchange rate remained unchanged at N379.00 and N380.69 at the official and SMIS windows, respectively.
Though, at the Investors/exporters window, the naira came under further pressure shedding 1.3% week on week or N5.33 to N410.00.
In market report, Chapel Hill Denham said average daily turnover in the Investors/Exporters Window declined by 31.4% last week over the previous to US$45.71 million.
The firm said this reflects weak investor apathy and low confidence in the price discovery mechanism of the window, amidst weak supply by the CBN into the market.
In the parallel market, the naira fell by 1.05% last week by N5.00 to N478.00 while the external reserves declined by 0.64% in the same period to US$35.53 billion.
The Central Bank of Nigeria (CBN) published the 2020 Half-Year Activity Report which showed that a total of US$10.31 billion was sold at the foreign exchange market.
This comprised US$5.06 billion at the I & E window, US$1.20 billion at the inter-bank spot, US$570.00 million for SMEs, US$312.00 million for invisible, while forwards sales were US$3.17 billion.
The Bank purchased a total of US$2.21 billion, which resulted in a net sale of US$8.10 billion. The sum of US$5.43 billion matured at the forwards segment, while US$2.50 billion was outstanding as at June 2020.
“The duration apathy in Nigeria’s fixed income market persisted last week as investors remained cautious amid a bearish Debt Management Office (DMO) bond auction, rising inflation expectation, anticipated tighter monetary policy by the CBN and expectation of greater supply of bonds”, Chapel Hill Denham stated.
Notably, yields expanded across the benchmark bond yield curve by an average of 44bps to an 8-month high of 10.18%.
In the interbank market, liquidity conditions were broadly benign, until huge outflows on Friday led to a spike in funding rates.
As a result, the NTB benchmark curve was flat at an average of 1.45%, although the OMO curve eased by an average of 30bps wow to 6.02%.
Chapel Hill Denham said all key data releases last week provided additional justification for bond bears, noting that the January inflation data was a negative surprise.
Headline inflation maintained an upward trajectory for the 17th month, printing higher by 71 bps to a 45-month high of 16.47% year on year.
Also noted was the outcome of the DMO’s February bond auction was bearish, as marginally rates surged by an average of 254bps to 11.10%: MAR-27 (+227bps to 10.25%), MAR-35 (+251bps to 11.25%), JUL-45 (+285bps to 11.80%).
The DMO offered N150 billion, but demand was weak with investor subscription pegged at N189.51 billion, implying a bid-offer ratio of 1.3x, compared to 1.6x in January.
Investors demanded substantially higher yields, hence, the DMO allotted only N80.55bn at the open auction and issued an additional N122bn as a non-competitive allotment.
Lastly, the Q4-2020 GDP data published by the DMO on Thursday showed that the Nigerian economy made a surprising early recovery from the COVID-19 induced recession, which lasted from Q2 to Q3-2020.
Economic activities expanded by 0.11% year on year, a sizeable improvement from -3.62% year on year in Q3-2020.
“Given heightened macroeconomic instability – elevated inflationary pressures and wide FX parallel market spread – the argument for a pro-growth monetary policy bias will increasingly become weaker, particularly as economic activities have surpassed expectation in recent quarters”, the firm stated.
Notwithstanding considering the aggressive upward repricing of yields in recent weeks and the sizeable cash position of local asset managers, analysts at Chapel Hill Denham said they expect buyers to return to the market once 10ys rise above 12%.
This week, analysts said investors will be looking forward to the NTB auction holding on Wednesday.
The CBN, on behalf of the DMO, is expected to offer a total of N128.2bn across three tenors: 91-day (N20.37bn), 182(N55.85bn) and 364-day (N52.0bn).
The previous auction cleared at 1.0%, 2.0% and 4.0% respectively.
“We expect system liquidity to improve this week, due to the disbursement of February FAAC allocation and OMO maturities totaling N472.42bn.
“Yet, odds are in favour of higher-stop rates on Wednesday” Chapel Hill Denham maintained.
The Sub-Saharan African (SSA) Sovereign foreign currency (FCY) bond yields rose last week, amid a global bond selloff, sparked by a global reflation trade which led to a surge in US treasury yields.
The ongoing reflation trade in global markets, which could lead to rising interest rates as markets begin to speculate on Quantitative Easing (QE) tapering in the US, is a major upside risk to FCY bonds yields in 2021.
“For now, the US Fed has assured markets it is not a hurry to withdraw its accommodative support, and we do not envisage any tightening of monetary policy in the near term, given structural labour market challenges likely to emerge post-crisis”.
However, Chapel Hill Denham express believe that credit risks and the possibility of taper tantrum are thematic subjects for 2021.
Investors/Exporters FX Window Records 34.1% Turnover Drop, Dust Confidence