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Interbank rates’ volatility to persist as DMO issues N135bn bond

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THE volatility in cost of funds in the interbank money market will persist this week as the Debt Management Officer (DMO) issues FGN Bond of N135 billion. The market experienced wide swings in short term cost of funds, last week, due to funds outflow occasioned by Central Bank of Nigeria’s (CBN) liquidity mop-up through treasury bills and dollar sales.

As a result, average short term interbank interest rate rose sharply to 79 per cent in the early part of the week from 5.4 per cent the previous week, before dropping to 15.10 per cent at the close of the week on Friday.

Data from Financial Market Dealers Quote (FMDQ)  showed that interest rate on Collateralised lending rose from 5.33 per cent the previous week to 75.8 per cent on Wednesday but dropped to close at 14.5 per cent on Friday. Similarly, interest rate on Overnight lending rose from 5.75 per cent the previous week to 80.58 per cent on Wednesday but dropped to close at 14.9 per cent on Friday.

Financial Vanguard analysis of treasury bills trading showed that the CBN offered to sell N302 billion worth of bills while subscription stood at N287.2 billion, with the apex bank selling N230.6 billion. In a bid to mop up liquidity the CBN issued N125 billion worth of secondary market bills (Open Market Operation, OMO) which was undersubscribed by 30 per cent as total subscription stood at N75.8 billion, while the CBN    eventually sold N53.6 billion.

At the Primary Market, where fresh bills are issued, the apex bank offered N177 billion worth of bills which was oversubscribed by 19.4 percent, with subscription at N211.4 billion, while the CBN sold N177 billion. The above, coupled with outflow for dollar purchase during the week,    nullified the impact of inflow through payment    of    N68 billion for matured bills earlier in the week.

Consequently market liquidity (idle cash) dropped from N130 billion at the beginning of the week to zero balance at the end of the week. This precarious liquidity situation will be aggravated this week due to N135 billion bond issue by the DMO. The bond issue which is scheduled for Tuesday with settlement on Friday comprise N35 billion worth of five-year bonds, N50 billion worth of 10-year bond and N50 billion worth of 20-year bond.

This combined with outflow for dollar purchase is expected to nullify impact of expected inflow of N89.9 billion through payment of matured OMO bills. Analysts were, however, divided in their projections for the week. While analysts at Cowry Asset Management Plc and Afrinvest Plc projected improved liquidity, analysts at Vetiva Capital Management Limited and FBN Merchant Bank however projected tight liquidity condition.

According to Cowry Assets analysts: “This week there will be maturing treasury bills worth N89.96 billion in the secondary market segment. Hence, we expect financial system liquidity ease and resultant stability in interbank rates.”

Vetiva Capital analysts, however, stated: “With the CBN expected to continue its OMO interventions in the coming week, we foresee more mixed trading in the T-bills space with a bearish bias as tight liquidity continues to weigh on the market”.


Naira in mixed performance as CBN injects $449.3 million


The naira recorded mixed performance last week even as the CBN injected $449.3 million to boost dollar supply. While the naira appreciated at the Investor and Exporters (I&E) window, it depreciated at the parallel market.

Data by the FMDQ showed that the reference rate for the I&E window, also known as Nigeria Autonomous Foreign Exchange Market (NAFEX) dropped to N365.02 per dollar on Friday from N366.44 per dollar the previous week, translating to N1.42 appreciation for the naira.

However the naira depreciated by N1.50 in the parallel market, as the parallel market exchange rate rose to N367.5 per dollar on Friday from N366 per dollar the previous week.This was despite dollar sales of $125.8 million to the 3,145 bureaux de change (BDC) operators across the country during the week. Investigation revealed that the depreciation was occasioned by increased demand for dollars in the parallel market.

During the week, the CBN injected $449.3 million into the interbank foreign exchange market. On Monday, it offered $195 million comprising:    $100 million for authorized dealers in the wholesale window; $50 million for the Small and Enterprises (SMEs) window; and $45 million for invisibles such as Business Travel Allowance (BTA), Personal Travel Allowance (PTA), tuition and medical bills.

On Friday the apex bank injected $254.3 million into the retail segment. According to the Acting  Director, Corporate Communications department, CBN, Mr. Isaac Okorafor, the sale was in response to bids received from authorized dealers, on behalf of their customers, at the retail auction announced by the CBN on Wednesday, July 5, 2017. He disclosed that the $254.3m sold was for companies in the raw materials, agricultural, airline and petroleum industry.

This week, analysts projected that the apex bank is expected to sustain its intervention in the foreign exchange market hence relative stability in the exchange rate of the naira. Analysts at Afrinvest Plc stated: “In the week ahead, we expect the CBN to continue to keep rates stable at the official market whilst also boosting liquidity in the BDC/Parallel end via retail market sales.”

In the same vein, analysts at Vetiva Capital Management Limited said: “We expect the CBN to continue intervening in the currency market to further improve liquidity and prop up the naira.”

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