Money market: Foreign reserves may pressure naira, as rates trend lower - BLUEPRINT

September 2, 2019

BY  Blessing Anaro


Despite the fact that China put on hold its retaliatory measure weekend, trade tension in the global markets further forced oil prices down. That, combined with the declining foreign reserves may spell doom for the naira, even as the Central Bank of Nigeria (CBN) continues to defend the local currency, analysts said.

The price of Brent crude oil slumped to as low $58.35/bbl during the week, while the foreign reserves level fell to $43.7 billion (08/28/2019), down 0.9 per cent from $44.5 billion recorded last week Wednesday. It was noted that China has put on hold the proposed retaliatory measures as at the end of the week.

The CBN spot rate traded flat all week to close at N307.00/$, depreciating five kobo W-o-W from N306.95/$. Similarly, at the parallel market, rate opened at N360.00/$ and traded flat all week.

At the Investors' & Exporters' (I&E) FX Window, the NAFEX rate opened the week at N362.69/$ and closed at N362.93/$ on Friday, appreciating 21obo W-o-W from N363.14/$. Activity level in the I&E Window fell 7.9 per cent to $1.6 billion from $1.8 billion recorded in the previous week.

At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts settled at $11.0 billion, up $82.0 million (0.8 per cent) from $10.9 billion in the prior week.

The SEPT 2020 instrument (contract price: N365.47) received the most buying interest in the week with additional subscription of $8.4 million which took total value to $14.15 million. On the other hand, the OCT 2019 instrument (contract price: N363.82) was the least subscribed with a total value of $1.1 billion, with subscription declining by $54.0 million. Despite external reserves at $43.7 billion (as at 08/28/2018) and declining crude oil prices, we maintain a positive outlook on the CBN's continued ability to support FX market liquidity and stability.

Treasury Bills Market Last week, Open Bay Back (OBB) and Overnight (OVN) rates opened at 12.6 per cent and 13.5 per cent respectively, lower than previous week's close of 17.7 per cent and 18.8 per cent as system liquidity stood at N29.3bn.

However, on Thursday, as Open Market Operation (OMO) maturities worth N393.3 billion flooded the system, the rates trended even lower at 6.3 per cent and 7.4 per cent respectively. By the close of the week OBB and OVN settled at 9.3 per cent and 10.5 per cent in that order as system liquidity closed at N1.1 trillion.

At the Primary Market Auctions, there was a roll-over of N208.6 billion in maturing T-Bills across all maturities. The marginal rates across tenors closed higher at 11.1 per centb, 11.6 per cent and 12.9 per cent for the 91-day, 182-day and 364-day tenors respectively compared with previous auction marginal rates of 9.7 per cent, 11.4 per cent and 12.0 per cent. The higher rates indicate increasing investor appetite for higher yields in compensation for the country's riskiness.

As recorded in previous auctions, demand was tilted to the 364-day instrument with a bid-to-cover ratio of 1.9x (Offer: N145.5 billion; Subscription: N272.5 billion). The 91-day and 182-day were also oversubscribed at 1.2x (Offer: N38.8 billion; Subscription: N46.2 billion) and 1.2x (Offer: N24.4 billion; Subscription: 29.1 billion) respectively. The CBN also held two OMO auctions this week.

For the first auction on Thursday, the bank offered a total of N400.0 billion across three instruments to keep system liquidity in check in the face of huge maturities. Investors again preferred the long-term instruments as it recorded oversubscription with bid-to-cover ratio of 1.5x (Offer: N200.0 billion, Subscription: N290.83 billion) while the short-and medium-term bills were grossly undersubscribed at 0.1x bid-to-cover ratio apiece.

Sales were underwhelming at N48.1 billion (12.0 per cent of offer amount) and the instruments were issued at stop rates of 11.6 per cent, 11.8 per cent and 13.0 per cent for the 91-day, 189-day and 364-day instruments, higher than those of previous auction and rates at the treasury bills auction. On Friday, the CBN held another auction with a total offer of N400.0 billion across three instruments; 90-day, 188-day and 363-day instruments.

Again, the longer-dated instrument enjoyed the most demand at bid-to-cover of 1.1x while the short and medium dated instruments were poorly subscribed at 0.03x and 0.05x bid-to-cover ratio respectively. Instruments worth N222.1 billion were sold at stop rates of 11.6 per cent, 11.8 per cent and 13.5 per cent for the 90-day, 188-day and 363-day instruments respectively. Investors remain unrelenting in the demand for higher rates thereby, widening Nigeria's risk premium.

In the secondary treasury bills market, performance was bullish as average rate fell by 69 basis points (bps) to close at 12.6 per cent Week-on-Week (W-o-W). The medium-term instruments recorded the highest buying interest as rates dipped 154bps to close at 12.9 per cent, rates on the short-term instruments also declined by 55bps to 12.3 per cent while the long-term instruments closed flat at 12.5 per cent.

"We expect the apex bank to keep liquidity in check through regular auctions, albeit at higher rates, given OMO maturities of N204.1 billion expected this week", said analysts at Afrinvest.

Bonds Market Last week, bullish momentum resurfaced in the domestic bonds market as average yield declined 25bps to settle at 14.2 per cent W-o-W. The market recorded bullish performance on four of five trading days of the week; Monday (-17bps), Tuesday (-11bps), Wednesday (-1bps), Thursday (-2bps) and a bearish outing on Friday (+7bps). Across the term structure, the short-term bonds enjoyed the most buying interest and yields declined 141bps while yields on the medium-term and long-term instruments fell 22bps and 8bps respectively.

In the SSA Eurobonds segment, the trend remains the same as all instruments that we track posted gains W-o-W. As observed in past weeks, the Zambian 2022 and 2024 instruments led the pack with yields shedding 206bps and 192bps respectively. The Ghanaian and Nigerian 2049 instruments trailed again with 88bps and 83bps drop in yields respectively.

For the corporate Eurobonds market, we increased our coverage universe to include instruments from other African countries and the bullish momentum remains strong as all instruments gained W-o-W save for the SOUTH AFRICAN SIBANYE GOLD LTD 2023 instrument that recorded a 2bps rise in yield.

The NIGERIAN SEPLAT 2023 instrument enjoyed the most buying interest as yields declined by 72bps while the MAURITIUS NEERG ENERGY LTD 2022 trailed with a 64bps decline in yields. Given weakening global growth, investors are expected to remain attracted to emerging market instruments.


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Steven Rich
Sep 17, 2018:
Well done
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