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Naira depreciation to persist as political campaigns pressure forex market

Cost of funds fall as investors shun N450bn OMO TBs

By Babajide Komolafe

THE depreciation of the naira in the last two weeks may persist this week following increased demand for dollars triggered by political campaign activities across the country. Last week, the naira depreciated to new levels in the parallel market and in the Investors and Exporters, I&E, window.

According to naijabdcs.com, the live exchange rate platform of the Association of Bureaux De Change Operators of Nigeria, ABCON, the parallel market exchange rate rose to N362 per dollar last week from N361.5 per dollar the previous week, translating to N50 kobo depreciation.

Thus the naira had depreciated by N1.50 in the parallel market in two weeks.

Naira

The N362 per dollar exchange rate represents the highest exchange rate in the parallel market since the Central Bank of Nigeria, CBN, increased weekly dollar sales to bureaux de change, BDCs, by 50 percent to $60,000 per BDC from $40,000 per BDCs.

Speaking to Financial Vanguard, ABCON President, Alhaji Aminu Gwadabe, said the depreciation was due to increased dollar demand triggered by electioneering campaign as well as year-end spending across the country.

Oil price continues downward slide

The pressure is expected to persist and possibly increase even as political parties step up campaign activities in preparation for the general elections in February. Thus the rise in parallel market exchange rate might persist except the CBN intervene to address the pressure.

In the I&E window, the naira depreciated by 69 kobo, as the indicative exchange rate rose to N364.7 per dollar last week, the highest this year, from N364.01 per dollar the previous week. This, combined with the 41 kobo depreciation the previous week means the naira had depreciated by N1.1 in two weeks in the window.

The depreciation of the naira in the I&E window is driven by demand pressure triggered by capital outflow from the country courtesy declining external reserves and apprehension over the forthcoming elections.

According to Bismark Rewane, Managing Director/Chief Executive, Financial Derivatives Company, this  trend will likely persist. “Naira pressure to increase in forex market”, he said while commenting on the outcome of the Monetary Policy Committee, MPC, meeting last week.

Capital outflow

Analysts at Afrinvest, however, expressed optimism that the CBN intervention will not allow the capital outflow to affect the stability of the naira.

“Whilst the recent downside risk of capital flow reversals is not anticipated to disperse in the coming week, we expect the potency of the apex bank’s intervention supplies to steady exchange rates across major market segments”, they said.

Meanwhile the CBN sustained its weekly intervention in the foreign exchange market by injecting $210 million through the interbank foreign exchange market. The apex bank allocated $100 million to the wholesale segment, $55 million to the SME window and $55 million for invisibles.

However, the nation’s external reserves maintained its downward trend last week though at a slower pace. The reserves fell to $41.523 billion Thursday last week from $41.62 billion Thursday the previous week. This translates to week-on-week decline of $97 million, which represents 29 percent lower than the $136 million week-on-week decline recorded the previous week.

Cost of funds fall as investors shun N450bn OMO TBs

Cost of funds fell in the interbank money market last week following increased market liquidity buoyed by low patronage of the N450 billion secondary market (Open Market Operations, OMO) treasury bills issued by the CBN to mop up liquidity from the market.

The N450 billion OMO TBs offer was grossly undersubscribed hence the apex bank was only able to sell N199.6 billion.

On the other hand the market enjoyed inflow of N409 billion from matured TBs, leading to decline in short term interbank interest rate.

According to FMDQ, Interest rate on Collateralised (Open Buy Back, OBB) lending fell by 50 basis points (bpts) to 5.83 percent last week from 6.33 percent the previous week. Similarly interest rate on Overnight lending dropped by 59 bpts to 6.58 percent last week from 7.17 percent the previous week.

 

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