Anticipated $3.4bn SDRs from IMF, $6.2bn Eurobond Issuance Lift Naira at BDC, Parallel Markets

Eromosele Abiodun and Darasimi Adebisi
Despite the suspension of supply of foreign exchange sales to Bureau De Change (BDCs) by the Central Bank of Nigeria (CBN, the naira strengthened against the dollar at the BDC and parallel markets by 0.98per cent and 1.35per cent last week to close at N505 and N510 respectively.

However, the naira at the Investors & Exporters Foreign Exchange (I & E FX) window in its week-on-week (WoW) performance depreciated by 0.01 per cent to close at N411.5 against the dollar from N411.4 4 it opened for trading last week.

Analysts believe the speedy appreciation of the local currency against the greenback– which earlier touched N525 against the dollar after the CBN’s announcement – may have been caused by the expectation of foreign currency inflows from Eurobond issuance of $6.2 billion and the anticipated $3.4 billion Special Drawing Rights (SDRs) from International Monetary Fund (IMF).

Naira at the CBN window last week traded flat at N409.11 against the dollar at buying rate and N410.11 against the dollar at Selling rate.

On the flip side, the naira at the CBN window appreciated by 0.33 per cent to N569.52 against the pound sterling at buying rate in week-on-week (WoW) performance from N571.39 against the Pound sterling in prior week’s trading, and also gained 0.69 per cent to N483.04 against the euro at buying rate prior’s week exchange rate transaction.

It was learnt that the CBN injected $210 million into the foreign exchange market with a breakdown of $100 million allocated to Wholesale Secondary Market Intervention Sales (SMIS), $55 million was allocated to Small and Medium Scale Enterprises and $55 million was sold for invisibles.
Despite the CBN intervention, the foreign reserves increased to $33.57billion as at August 5, 2021 from $ 33.40billion it closed in June.

Reacting, analysts at Cowry Assets Limited noted that, “In the new week, on the back of the anticipated dollar inflow and recent accretion to the external reserves – foreign exchange reserves rose w-o-w by 0.48per cent to close at $33.5 billion –, we expect Naira to further strengthen against the greenback at most foreign reserves segments, especially at the parallel market.”

Also, analysts at Cordros Research said, “We expect improved liquidity in the I& F FX window over the medium term, given our expectation of (1) increased oil inflows in line with the rise in crude oil prices, and (2) inflows from FCY borrowings ($6.20 billion) and IMF SDR ($3.40 billion). Accordingly, we expect the naira to remain relatively range-bound (N410.00 against the dollar – NGN415 against the dollar) at the I & E FX window.”

Meanwhile, the values of FGN Bonds increased last week as traders’ bids were filled at lower yields for most of the maturities tracked.
Trading in the Treasury bonds secondary market sustained its bullish run as the average yield contracted by 13basis points to 11.9per cent.

Specifically, yields fell further for the 5-year 13.53% FGN APR 2025, 10-year 13.98% FGN MAR 2028 and the 10-year 16.29% FGN MAR 2027 gained N0.26, N0.29 and N0.63 respectively; their corresponding yields fell to 11.30% (from 11.39%), 12.25% (from 12.32%) and 12.30% (from 12.50%) respectively.

“Next week, we still expect lower average yields as investors continue to cherry-pick relatively attractive instruments. In the longer term, we also maintain our view of tempered yields in the second half of the year, given our expectations of limited supply and deliberate efforts by the DMO to reduce borrowing costs for the government,” according to analysts at Cordros Research.
Meanwhile, given the small value of matured OMO bills worth N19.26 billion, NIBOR rose for all maturities tracked amid financial liquidity squeeze.

Specifically, NIBOR for Overnight funding, 1 month, 3 months and 6 months rose to 18 per cent (from 8.67 per cent), 15.65 per cent (from 11.92 per cent), 16.93 per cent (from 13.50per cent), and 18.05 per cent (from 14.55per cent) respectively.

In addition, overnight (OVN) rate expanded by 12.75ppts w/w to 20.5per cent.
Analysts at Cordros research noted that the rate remained in the single-digit territory through most part of the week following a higher net liquidity position (this week’s average: N219.50 billion vs last week: N80.69 billion) supported by OMO maturities (N19.20 billion).
However, the eventual expansion was driven by debits at the latter part of the week for CRR debits and CBN’s weekly FX auction.