Naira Depreciates over Weak Foreign Currencies Supply

Naira Depreciates over Weak Foreign Currencies Supply

The Nigerian local currency, Naira, depreciates further in the foreign exchange market due to low supply emanated from weak external reserve buffer for apex bank’ weekly intervention.

Foreign currencies inflow still remain low as the nation’s external reserve remain weak despite uptrend in global oil prices.

Last week, the domestic currency traded flat at the Central Bank of Nigeria’s (CBN) spot market at ₦379.00 to dollar.

However, at the parallel market, naira depreciates ₦4.00 to ₦482/$1.00 while the local currency also plunged at the Investors’ & Exporters’ (I&E) Window by 25kobo to ₦410.25/$1.00.

A leading investment firm, Afrinvest, said in a market report that activity level in I&E Window surged 92.8% to $498.8 million just last week from $258.6 million recorded in the previous week.

The nation’s external reserve still reads below $36 billion, as foreign exchange supply in the Investors & Exporters Window trail pre-pandemic era.

Meanwhile, oil prices inched higher with the benchmark Brent crude up by 6.7% week on week to $66.28 per barrel despite concerns about increasing supply.

In its note, Afrinvest stated that the total value of open contracts of the naira at the FMDQ Securities Exchange (SE) FX Futures Contract Market fell 20.0% ($1.5bn) to $6 billion.

Analysts also noted the FEB 2021 instrument with a value of $1.6 billion matured during the week.

The FEB 2022 instrument at contract price of ₦435.58 received the highest subscription of $175.5 million which took total value to $292.9 million.

On the other hand, the DEC 2021 instrument at contract price of ₦432.58 recorded sell-offs totaling $82.1 million depleting total value to $333.3 million.

“We expect the exchange rates to remain range-bound at the various markets in the coming week”, Afrinvest said.

Meanwhile, weak performance was recorded in the secondary T-bills market following yield repricing in the fixed income space.

The open buy back (OBB) and overnight (OVN) rates opened the week lower at 15.0% and 15.3% respectively from previous week’s close of 20.0% and 20.5% as system liquidity settled at ₦80.8 billion.

Analysts noted that as at Tuesday, OBB and OVN rates fell to 1.8% and 2.0% respectively as system liquidity rose to ₦659.3 billion following OMO maturities and coupon payment worth ₦476.4 billion and ₦49.9 billion respectively.

By the close of the week, Afrinvest stated that the rates settled at 5.7% and 6.3% respectively as system liquidity printed at ₦565.8 billion.

Last week, the CBN conducted T-bills sales worth ₦128.2 billion on Wednesday, same as maturing amount.

Thus, market record showed demand for the 91 and 364-day instruments was strong with bid-to-cover ratio of 1.4x and 2.4x respectively.

However, the 182-day instrument saw weak demand with a bid-to-cover ratio of 0.7x.

Analysts however noted the stop rates inched higher at 2.0%, 3.5% and 5.5% from1.0%, 2.0% and 4.0% in the previous auction for the 91-day, 182-day and 364-day instruments respectively.

In its weekly activities, the CBN also offered OMO instruments worth ₦330.0 billion on Thursday, ₦4.5 billion higher than total sales.

The 173 and 362-day instruments saw high subscription with a bid-to-cover ratio of 1.1x and 2.2x respectively while demand for the 96-day instrument was low at 0.9x, Afrinvest noted.

Analysts however noted the marginal rates were maintained at 7.0%, 8.5% and 10.1% for the 96, 173 and 362-day instruments respectively.

In the secondary T-bills market, performance was also weak as average yield climbed 16 basis points week on week to 1.8%.

The 91 and 182-day instruments saw sell pressure as yield rose 43bps and 6bps week on week respectively while the 364- day instrument was flat.

“In the coming week, we expect maturities worth ₦130.5 billion from the OMO markets thus, we expect liquidity mop-up”, Afrinvest said.

Bullish Performance in the Domestic Bond Market

Elsewhere, the domestic bond market posted a positive outing last week as average yield declined 26bps to 9.2% from previous week.

Segment data showed that yield declined on all trading sessions save on Monday when rate jerked up 11 basis points.

Across tenors, the short and medium- term bond enjoyed the most demand following an 81bps and 25bps fall in yield respectively.

Meanwhile the long-term bonds witnessed massive sell-offs as yield rose 12 basis points week on week.

In the SSA Eurobonds market, the bearish outing was sustained as average yield rose 38bps to 7.7%.

“This can be attributed to weak sentiment towards SSA instruments following rising yields in the US bonds to a year high of 1.6%”, Afrinvest said.

“All instruments under our coverage saw sell-offs save the Kenyan 2024 instrument, which recorded a 14bps yield decline week on week”, analysts added.

It was noted that sell pressures were dominant in the Ghanaian and Zambian 2022 instruments as yield increased 342 basis points and 105 basis points week on week respectively.

Afrinvest said across the African Corporate Eurobonds market under its coverage, there was also a negative performance as average yield climbed 8bps to 4.4%.

The SEPLAT 2023 and ACCESS 2021 instruments saw high demand which pushed yield lower by 16bps and 11bps week on week respectively.

Conversely, analysts said there were huge sell-offs in ESKOM 2025 and NEERG ENERGY 2022 instruments as yields climbed 37bps and 24bps respectively.

“In the coming week, we expect to see a sustained bullish outing in the domestic bond markets as investors seek higher yield.

“Meanwhile in the Eurobond space, the direction of the US bond yield remains the focal point thus guiding sentiment”, Afrinvest said.

Naira Depreciates over Weak Foreign Currencies Supply