A substantial interest-rate hike on Tuesday may have shifted the odds for the Nigerian naira after the currency declined more than 40% this year.
Moves in the forward market indicate the next currency move could be stronger after central bank governor Olayemi Cardoso and fellow policymakers delivered an interest rate hike of 400 basis points, exceeding a forecast by economists surveyed by Bloomberg.
One-month non-deliverable forward contracts in naira dropped for a fourth day, the longest streak in a month. They traded at 1,545.34 per dollar as of 2:30 p.m. in London.
The spot market’s reaction to the rate hike will likely only be known after markets close and the official rate is fixed.
Danelee Masia, an economist at Deutsche Bank AG, forecasts an exchange rate of 1,450 naira to a dollar for the year. “It has been one of the most volatile episodes for the naira. It’s because we are moving toward a price-discovery system,” Masia told Bloomberg Televsion before the rate decision.
“The reforms already implemented will help us see a stable naira of around 1,450 for the year. Anything that gets delivered above 300 basis points will be welcomed by the market,” Masia said.
Local Pain
The naira has depreciated 43% versus the dollar this year, making it the second-worst performing currency in the world behind the Lebanese pound.
Naira-denominated bonds have generated losses of 46% year-to-date in dollar terms. That’s the worst compared with a Bloomberg index tracking the performance of emerging market sovereign local debt.
The yield on 12-month bills rose following the rate decision. Strategists, including at Bank of America Corp., say that local markets are attractive due to the offered yields and carry.
Meanwhile, dollar bonds have outperformed peers, returning 0.9% to investors in the year-to-date, compared with a loss of 0.7% on Bloomberg’s EM sovereign hard currency gauge. The bonds initially jumped on the rate news but were little changed amid some profit taking.
“If we take a step back, the Nigeria complex has already outperformed peers significantly in recent months, so further relative-value gains may require additional catalysts such as fresh portfolio inflows or a back-up in FX reserves,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank Plc.
“Some investors may also feel that further dollar bond gains could increase the risk of new issuance,” he said.
