By Babajide Komolafe

There is uncertainty over the direction of cost of funds in the interbank money market this week as the Central Bank of Nigeria (CBN) is expected to sustain its aggressive liquidity mop up amidst inflow of N113 billion.

Last week, the CBN mopped up N597 billion from the interbank market through sale of treasury bills (T-bills). Financial Vanguard analysis showed that the apex bank offered N367 billion worth of secondary market (open market operation, OMO) bills and N349 billion worth of primary market bills with public subscription of N367 billion and N307 billion respectively. The CBN sold N367 billion worth of OMO bills with stop rates ranging from 17.95 per cent to 19.55 per cent. It also sold N230 billion worth of primary market bills with stop rates ranging from 13.35 per cent to 18.53 per cent.

The above includes special OMO bills of N100 billion and N50 billion issued on Thursday and Friday respectively, indicating the determination of the apex bank to rid the market of excess liquidity.

These  outflow through TBs as well as outflows  for dollar purchase cancelled the impact of the N349 billion inflow through payment of matured TBs during the week.
As a result, market liquidity fell by 50 per cent to N76.4 billion from N169.85 billion at the beginning of the week.

In response short term cost of funds shot up by over 3000 basis points, from average of 5.4 per cent the previous week to average of 22.25 per cent at the close of last week. Data from Financial Market Dealers Quote (FMDQ) showed that interest rate on Collateralised lending rose from 5.0 per cent the previous week to 22 per cent at the close of business on Friday. In the same vein, interest rate on Overnight lending rose to 22.5 per cent at the close of business on Friday from 5.83 per cent the previous week.

Analysts were however uncertain about the direction of interest rates in the market this week. While the market is expected experience inflow from payment of matured TBs worth N113 billion and statutory allocation fund of over N500 billion, analysts predict that the CBN will continue its aggressive issuance of OMO TBs to mop up this inflow.

According to analysts at Afrinvest Plc, a Lagos based investment firm: “In the week ahead, there will be an OMO maturity of N113.1bn on Thursday but we expect the CBN to issue several OMO auctions to guide financial liquidity to target levels.”

Also, analysts at Vetiva Capital Management Limited  stated: “We expect demand in the T-bills market to remain capped by the liquidity squeeze even as the CBN continues regular mop ups.”

On their part, Cowry Assets Management Plc analysts said: “This week, in the absence of maturities and auctions, we expect further financial system liquidity ease and resultant stability in interbank rates”.

External reserve hits 3month high
The nation’s external reserve rose to three-month high of $30.93 billion last week Thursday.
Data from the CBN showed that the external reserve which opened the year at $25.84 billion rose to seven-month high $30.98 billion on May 4th 2017. Since then the reserve has been fluctuating due to combination of increased dollar sales by CBN and decline in crude oil price.

This trend changed on July 7th 2017, with the reserve recording steady rise, buoyed by improved foreign exchange inflow occasioned by increase in crude oil price and oil production level, as well as dollar inflow from foreign portfolio investors facilitated by the Investors and Exporters (I&E) window introduced in April.
The steady rise of the external reserve is expected to persist in the third quarter of the year as crude oil price is expected to remain between $50 and $55 per barrel for the rest of the year.

Naira records first NAFEX appreciation in 2weeks
The declining fortune of the naira in the Investors and Exporters (I&E) window was reversed last week.

Data from Financial Market Dealers Quote (FMDQ)  showed that the naira last week recorded its first weekly appreciation of N1.16 after two weeks of N4 depreciation against the dollar,  in the window, which is  also known as Nigeria Autonomous Foreign Exchange (NAFEX).

According to FMDQ, the indicative exchange rate for the window dropped to N366.44 per dollar at the close of business on Friday from N367.6 per dollar the previous week. The naira however remained stable at N365 per dollar at the parallel market.

Meanwhile the CBN continued its intervention in the foreign exchange market by selling $195 million dollars in the interbank forex market. This comprised
$100 million for wholesale auction and $50 million and $45 million for  the Small and Medium Enterprises (SMEs) and invisible segments.