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Naira depreciation: CBN to intensify liquidity mop up, forex intervention this week

As N300bn FGN bond matures

By Babajide Komolafe

FOLLOWING the depreciation of the naira to its lowest level in eight months last week, the Central Bank of Nigeria, CBN, will this week, increase intervention in the foreign exchange market and intensify liquidity mop up in the interbank money market, in a bid to forestall further depreciation of the nation’s currency.

Financial Vanguard  investigation revealed that the increased demand for dollars by foreign portfolio investors exiting the nation’s financial markets, persisted last week, prompting the CBN to intervene in the Investors & Exporters (I&E) window for the second week, while also sustaining its weekly $210 million intervention in the interbank foreign exchange market.


The intervention, however, failed to save the naira from suffering its biggest weekly depreciation in the I&E window and parallel market. In the I&E window, the naira recorded its biggest weekly depreciation of 72 kobo as the indicative exchange rate rose N361.57 per dollar on Friday from N360.85 per dollar the previous week.

Also in the parallel market, the naira suffered its biggest weekly depreciation of N2 as the parallel market exchange rate rose to N366 per dollar last Friday from N364 per dollar the previous week.

“Foreign investors are not reinvesting proceeds of investment in matured treasury bills. This is due to the decline in interest rate on the treasury bills (TBs). Instead of reinvesting the proceeds,  they are taking them out and this translates to demand for dollars”, said Kunle Ezun, a research analyst with Ecobank Nigeria.

“Interest rate on Nigerian treasury bills has fallen by 500 basis points between January and now, and this is a disincentive to the foreign investors to continue to invest in these instruments”, explained Johnson Chukwu, Managing Director/Chief Executive, Cowry Assets Management Limited.

He said in addition to this, the political climate has become tensed and was titling towards uncertainty, which the foreign investors find uncomfortable. The above development is expected to persist this week, leading to possible further depreciation of the naira. “This week, we expect depreciation in the exchange rate at most market segment, especially the I&E window amid increase demand for U.S. dollar by foreign portfolio investors,” projected analysts at Cowry Asset Management Limited.

However, the CBN is expected to increase its intervention in the foreign exchange market, while also intensifying liquidity mop-up via Open Market Operation (OMO) TBs, offered at higher interest rate in bid to make them more attractive to investors.

N300bn FGN Bond matures this week

The expected increased liquidity mop-up this week is imperative in view of  inflow of N492 billion from maturing FGN Bonds and TBs.

The inflow which comprised N300 billion worth of maturing FGN May 2108 (10.7percent) bond and N192 billion worth of maturing TBs, is expected to boost market liquidity, and offset impact of primary market TB auction of N49.6 billion.

However, with the apex bank expected to intensify liquidity mop up, the inflow may not translate to lower cost of funds as witnessed last week. In spite inflow of N266.95 billion from matured TBs last week, cost of funds rose in response to sale of OMO TBs worth N113.31 billion by the CBN and sale of N50.45 billion worth of FGN Bond by the Debt Management Office (DMO).

Data from the FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending rose by 937 basis points (bpst) to 17.17 percent from 7.8 percent the previous week. Similarly, interest rate on Overnight lending rose by 1,067 bpts to 19.67 percent from 9.0  percent the previous week.

This trend, according to analysts at Cowry Asset is expected to persist this week. “This week, CBN will sell T-bills amounting to N49.60 billion via the Primary market; viz: 91-day bills worth N4.96 billion, 182-day bills worth N24.80 billion and 364-day bills worth N19.84 billion which will partly offset the maturing treasury bills worth 192.01 billion.  We expect their stop rates to rise while also expecting CBN to aggressively mop up via OMO sales to make yields attractive to portfolio investors and to soak up excess liquidity from Federation Accounts Allocation Committee (FAAC) injections. Financial system liquidity strain is therefore expected with resultant rise in interbank rates,” they said.



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