With the market in a panic mood coupled with the ‘dollarization’ effect of the electioneering spending, external shocks and internal political uncertainties, there may be no respite for the naira in the interim, according to Afrinvest analysts. The analysts noted that the inconsistency of forex guidelines and uncertainties traced to non-review of the mid-point of the exchange rate target band in the reality of a fundamental reprising may continue to fuel speculation in the FX market.
Consequently, they expect the Central Bank of Nigeria (CBN) to convey an emergency MPC meeting to address the challenges faced in the foreign exchange market. The N38.0 spread between the official and interbank rates presents incentives for arbitrage and round tripping while speculators following a herd pattern may prefer to hold the USD to preserve value.
“There is a strong possibility of the CBN taking a drastic action (perhaps conveying an emergency MPC meeting) in addressing the disparity in the different forex markets so as to save the foreign reserves — currently at US$33.5bn”, Afrinvest said in a report. The pressures on the naira at the interbank and parallel markets were amplified last week on the back of the crystallizing macroeconomic risks and political uncertainties that have spurred capital flow reversals in the financial market and triggered further speculation at the FX market.
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Ad-hoc interventions by the CBN to reduce the demand-supply gap failed to lift the local unit, as it weakened N2.0 and N3.1 on the close of trading on Monday and Tuesday. The interbank market was shut during official trading hours on Wednesday and Thursday as traders invoked “circuit breakers” designed to halt trading once naira weakened 3.0% from previous close. Despite this, and the reassurance by the CBN governor on Thursday to restore confidence, the naira slid further to close at N206.00/US$1.00 — all time weakest closes.
The central bank continues to provide foreign exchange at a discount in the primary market for importers of selected products. The bank offered US$200.0 million each at the bi-weekly RDAS auctions held on Monday and Wednesday and sold US$199.99 million and US$199.44 million at the marginal rates of N168.00/ US$1.00. On the other hand, analysts expect the volatility within the money market space to continue this week.
Money market liquidity opened last week quite low below N100 billion as DMBs made provisions for the CBN RDAS set to hold on Wednesday. As the CBN maintains its hawkish policy stance, there was liquidity outflow of N28.07 billion in the OMO auction on Monday.
The dearth of liquidity coupled with the scramble for same pushed rates higher as OBB and overnight rates went as high as 53.3% and 57.2% on Monday and were even higher on Tues- day at 68.3% and 73.3%, respectively. There was a significant fall in money market rates on Wednesday as liquidity improved on the back of an estimated N30 billion inflow from SURE-P and the refund unsuccessful RDAS bids.
Rates settled at 11.6% for the OBB and 12.1% for the overnight. Overall, despite the moderation recorded on Thurs- day as OBB and overnight rates closed at 13.6% and 14.3% on the back of OMO maturity of N285 billion, rates again surged on Fri- day to close at 76.7% and 80.2%, respectively.
