• Thursday, June 20, 2024
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Demand shifts to FX futures market on maturing $697m forwards contract


Nigerian corporate treasurers are redirecting their FX demand back to the Futures Market in a show of confidence as the Central Bank of Nigeria (CBN) begins funding of the forwards contract ahead of tomorrow’s maturity.

The local currency had weakened at the Spot Market against the greenback as investors expressed concerns over liquidity in the Nigerian FX market and pressured foreign reserves, amidst sizeable outstanding obligations from FX sales at the fowards market.

“This is a show of confidence and success of this market,” Kaodi Ugoji, vice president at FMDQ OTC Securities Exchange told BusinessDay on phone. 

Some $697 million the Central Bank sold in one-month forward contracts fall due later this month, traders said, with contracts for July delivery quoting the naira at N279 per dollar.

The Naira-settled OTC FX Futures market kicked-off barely a month ago with the CBN selling OTC FX Futures contracts of non-standardised amounts for different tenors from one month through to 12 months, which will settle on bespoke maturity dates, providing liquidity in the product that will enable corporate treasurers effectively and efficiently manage their FX risk.

On Friday, the CBN ended a rule capping the difference, or spread between bids and offers in the foreign-exchange interbank market at 50 kobo.

“The elevated concerns over a potential technical recession in Nigeria have forced the Central Bank of Nigeria to relinquish its stealth peg to truly allow the naira to be determined by the natural forces of supply and demand,” Lukman Otunuga, a research analyst of FXTM a currency trading firm, told BusinessDay.

“Although there may be concerns of inflation spiralling out of control as the naira finds its true value in the short term, this could be the first true steps for the nation to shield itself from external risks.”

Nigeria’s economy, the largest in Africa, is dealing with declining oil production from renewed militancy and slowing growth.

The government of President Muhammadu Buhari has also seen revenues plunge with oil prices, with pressure on the naira currency helping to fuel inflation.

Annual inflation in Nigeria accelerated to 16.5 percent in June, data showed on Monday, it’s highest in almost a decade and the fifth monthly increase in a row, the National Bureau of Statistics (NBS) said, Monday.

Dealers yesterday introduced a maximum resale premium on dollar trades on the interbank market to boost liquidity after the naira touched a record low of N295.25 per dollar in thin trade on Friday.

Traders under the umbrella of the Financial Market Dealers Association (FMDA) set the spread at a ceiling of N0.50  per dollar on Monday, according to an email seen by BusinessDay.

Yesterday, the first trade of $780,000 occurred at N292.40 naira to the dollar at 11.16 GMT, more than three hours after the market opened.

Analysts see the CBN funding of the fowards market ahead of tomorrow’s maturity, stoking market confidence for further FX inflows.

“We will see a declining demand at the spot market with attendant impact on the USD/naira exchange rate at the Spot Market,” an analyst told BusinessDay on phone yesterday.   

Godwin Emefiele, the CBN governor and his deputy governor, Sarah Alade, met investors in the United States and London last week to entice them to buy naira assets.

Emefiele dismissed suggestions that there was too little foreign-exchange liquidity and said the black market was too small for them to use as a gauge of the naira’s true value.

Portfolio investors will likely view the reopening of the FX market as a positive development and are monitoring market developments in Nigeria very closely, Samir Gadio, head of Africa strategy and FICC Research at Standard Chartered Bank told BusinessDay.

“If price discovery and liquidity improve in the FX market over time, the offshore appetite for NGN traded assets could also increase gradually,” Gadio said.

“That said, market rates have not sufficiently repriced to trigger renewed fixed income portfolio flows. More aggressive open market operations OMOs – at higher yields – may be needed.”

Twelve month Treasury bill yielded 16.9 percent at the secondary market on Friday, data from the FMDQ website show.

The CBN OTC FX Futures rates released shortly after the launch show 1-month (July 2016) tenor rate at (N279/$); 3-month (September 2016) tenor rate at (N275/$); 6-month (December 2016) tenor rate at (N250/$); 9-month (March 2017) tenor rate at (N222/$); and 12-month (June 2017) tenor rate at N225/$.

The apex bank had sold $532million on the spot market and $3.487billion in the forwards market, out of which $697million was for the one-month, $1.22billion for the two months, and $1.57billion for the three-month contract.

“This past week saw the equities market extend losses, as investors continued to book recent gains as concerns linger over the effectiveness or otherwise, of the recently implemented FX regime, a policy which was earlier anticipated would be the major pull for the foreign portfolio players,” research analysts at United Capital plc said in their recent investment views.