Naira depreciates as turnover rises in market

…Cost of funds trend low

By Babajide Komolafe & Elizabeth Adegbesan

The volume of dollars traded (turnover) in the Investors and Exporters (I&E) window of the foreign exchange market grew by 26 per cent, month-on-month, to $5.3 billion in November from $4.2 billion in October, 2019.

This represents the first monthly increase in the monthly turnover since August.

Turnover in the window rose by 75 percent to $7 billion in August, courtesy of increased inflow from foreign portfolio investors (FPIs). Monthly turnover, however, dropped by 44 percent to $4.4 billion in September, from where it further fell to $4.2 billion in October, before rising by 26 percent to $5.3 billion in November.

The analysis of weekly turnover in the window showed that $112.88 million was traded in the first week of November, while $1.4 billion was traded in the second week. In the third week, turnover rose 14 percent to $1.6 billion but fell by 25 percent to $1.2 billion in the fourth week and down again by 17 percent to $991.68 million in the fifth week of November.

However, the naira depreciated by six kobo in November as the indicative exchange rate of the window rose to N362.81 per dollar on November 29 from N362.75 per dollar on November 1. Analysts, however, expect the naira to remain stable at current levels in the various segment of the foreign exchange market due to continued intervention by the CBN.

Cost of funds to remain low

Cost of funds will remain low in the interbank money market this week due to inflow of N344 billion from maturing treasury bills which would aggravate the excess liquidity situation in the market.

Last week, cost of funds remained stable following the inflow of N503.3 billion from matured secondary market (Open Market Operation, OMO) treasury bills. 

The inflow surpassed the outflow of N432 billion comprising of N150.62 billion through Nigeria Treasury Bills (NTB) auction and N281.45 billion OMO bills auction conducted by the Central Bank of Nigeria (CBN) during the week.

Consequently, average short term interbank interest rates remained almost unchanged, rising marginally by 13 basis points (bpts).

Data from FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending rose marginally by eight bpts, to 3.79 percent last week from 3.71 percent the previous week. Similarly, interest rate on Overnight lending rose marginally by 17 bpts to 4.5 percent last week from 4.43 percent the previous week.

Analysts expect this trend to persist this week, as the inflow of N344 billion from maturing OMO bills buoys market liquidity.

Analysts at Lagos based Cowry Asset

Management Company, in their projection for the week said: “In the new week, we expect stability in interbank lending rates in anticipation of inflows worth N344.88 billion in matured OMO bills.”

Similarly, analysts at Lagos based Afrinvest Securities Limited said: “In the coming week, we expect the CBN to sustain its OMO auction given that maturities worth N344.9 billion will hit the system. Also, we envisage the elevated system liquidity levels would continue to drive rates lower in the secondary T-Bills market.”

Bonds prices to maintain upward trend

Meanwhile, prices of FGN bonds in the Over-the Counter (OTC) segment are expected to maintain their upward trend, courtesy of increased demand occasioned by the exclusion of local investors from OMO bills auction.

According to Afrinvest analysts, performance in the domestic bond market last week was bullish due to increased demand across maturities and consequently, average bond yield declined 23bps Week-on-Week (WoW) to 12 percent.

 

Yield declined across the curve, with the short end enjoying the most buying interest, down by 204bps.

“We expect increased demand to continue on the back of the restriction of local investors from the OMO market”, they said.

Similarly, analysts at Cowry Assets said: “We expect FGN bond prices to increase (with corresponding fall in yields) at the OTC market amid anticipated boost in financial system liquidity.”