Policy on Remittances, Oil Price Rebound Could Restore Naira – Analysts
Following the Central Bank of Nigeria (CBN) policy re-direction, some currencies traders have said that Naira has been on stronger path to recovery from its earlier value depreciation.
While noting the rebound in crude prices, analysts also said new development around remittances from diaspora is a positive one for the local currency, Naira.
Last week, in the foreign exchange market, Naira remained unchanged at ₦379.00 and ₦380.69 at the official and secondary market intervention sales (SMIS) windows, respectively.
However, in the parallel market window, the naira gained ₦20 or +4.21% week on week to ₦475, after reaching ₦500 over the last weekend on significant sell pressures on the naira.
However, in the Investors and Exporters window, the naira slipped to ₦395.00 (-1.25% wow or ₦4.75).
Chapel Hill Denham noted that activity level in the I&E window was stronger with the average daily turnover further increasing by 15.14% week on week to US$131.85 million.
“We reiterate that the activity level in the window still falls short of the level seen in Q1-20 at US$350 million daily average”, analysts stated.
Recalled that OPEC+, comprising of the Organization of the Petroleum Exporting Countries (OPEC) and its allies, agreed on a compromise to increase output slightly from January but continue the bulk of existing supply curbs to cope with coronavirus-hit demand.
In the new deal, OPEC+ agreed to raise output by 500kbpd from January 2021, implying that the group will now trim production by 7.2mbpd, down from 7.7mbpd currently.
Since the announcement, Brent Crude prices have risen by 3.06% to US$49.25.
Chapel Hill Denham believes that the current play indicates two things for Nigeria.
For one, the firm expressed that a stronger recovery in crude oil prices is still largely dependent on how fast COVID-19 vaccines are rolled-out.
“For us, a quicker distribution of the vaccines connotes a sharper oil demand recovery, and perhaps, prospects of further ease in oil production cuts by OPEC+”, analysts explained.
The firm stated that oil price recovery will boost inflow into the nation’s external reserve.
“This implies higher oil inflows for the CBN, which should bolster the Bank’s ability to defend the currency”, it added.
Meanwhile, analysts said the reality is that Nigeria will have to wait longer for an increase in its output quota, owing to the need to make up for the previous over-production.
“We understand that the 500kbpd output ease, which begins in January, will not apply to Nigeria”, Chapel Hill Denham reckoned.
Unlike in the prior week, where supportive liquidity midwifed a bullish outturn, sentiments in the Nigerian fixed income market was mixed last week, with risk appetite largely muted, due to the renewed apathy for long-duration instruments.
Analysts noted that the benchmark bond yield curve compressed by an average of 14 basis points (bps) week on week to 4.20%.
This was mostly driven by investors’ apprehension towards long-duration positioning.
Read Also: CBN Moves against Non-Repatriation of Exporters’ FX Proceeds
Despite open market operations (OMO) maturities worth ₦341 billion which hit the system on Tuesday, Interbank funding pressures were stronger, especially at the twilight of the week.
“In our view, the combination of OMO sales totaling ₦60bn, together with the provisioning for the bi-weekly retail FX auction by the CBN comes to mind as the key driver of the uptick in funding rates”, Chapel Hill Denham said.
As a matter of fact, funding rates were mostly benign for most of the week, before expanding on Friday as liquidity thinned out.
Against that backdrop, rates increased slightly at the front end of the curve, as the Nigerian Treasury Bills and OMO benchmark curves expanded by an average of 4bps and 16bps to 0.14% and 0.28%, respectively.
Recall that the market received the Q1-21 NTB auction calendar, which showed that the Debt Management Office (DMO) plans to roll-over 100% of maturing bills.
In terms of breakdown, the DMO intends to issue ₦850.42bn in total, split across 91-day (₦76.8bn), 182-day (₦176.9bn), and 364-day (₦596.7bn) tenors.
While the DMO is looking set to mop up all maturing NTB over Q1-21, analysts said OMO maturities of more than ₦4.5tr in the same period will keep the system awash with liquidity, a development that will likely underpin a benign yield over Q1-21, assuming the CBN sustains its tolerance for liquidity.
Also, a circular from the CBN indicated that the Apex bank has approved the release of the excess above regulatory minimum CRR of banks via the instrument of “special bills”.
The CBN listed the features of the bill as tenor of 90-day, zero-coupon as applicable yield at issuance will be determined by the CBN.
It also indicated that the bills will be tradable among banks, retail and institutional investors, but not acceptable for repurchase agreement transactions with the CBN and shall not be discountable at the CBN window.
The special bill is not also qualify as liquid assets in the computation of liquidity ratio for deposit money banks.
“For us, the fact that the instrument is not discountable at the CBN window translates to zero new liquidity in the system.
“While the mechanics are unclear at this point, we believe a substantially higher yield offer, by the CBN, on the instrument relative to current market yield, should be positive for asset yield for DMB”, Chapel Hill Denham explained.
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