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Decline in external reserves weakens Naira in future market – Vanguard

dollar to naira

By Babajide Komolafe

The Naira weakened in the foreign exchange forwards market due to declining confidence triggered by persistent decline in the nation’s external reserve. The forwards market is for foreign exchange transactions to be delivered at agreed dates in the future. Last week the external reserves dropped by $104 million from $27.12 billion on April 29th to $26.919 billion on Thursday may 5th. Cumulatively the external reserve has fell by $2.15 billion from $26.92 billion at the beginning of the year.

This continuous slide in the external reserves, according to Cowry Assets Management Company led to depreciation of the naira in the forwards segment of the foreign exchange market.

For the One month forward contract, the naira depreciated by 0.44 percent to N201.32 per dollar, while it depreciated by 1.61 percent to N206.95 per dollar for the Three months forward. Six months and 12 months forward depreciated respectively by 3.19 percent and 1.37 percent to N215.77 per dollar and N224.17 per dollar.

This trend, according to Cowry Assets might persist this week. “We anticipate pressure on the naira exchange rates following weakened external sector environment”. Meanwhile cost of funds remained stable in the interbank money market last week due to stability in the level of liquidity in the market.

Though the Central Bank of Nigeria (CBN) mopped up N150 billion from the market through sales of treasury bills, the market also experienced inflow of N150 from payment of matured treasury bills. Hence market liquidity remained between N391 billion and N380 billion during the week. As a result short term interest rates remained stable at 3.0 percent during the week.

Afrinvest Plc however projected that interest rates movement this week will be dictated by liquidty infow and outflow from the market. The company in its weekly market update stated, “The financial system liquidity opened the week at about N300.1 billion on Tuesday (being the first trading day of the week due to Monday’s public holiday). Open Buy Back (OBB) remained at last week’s closing levels of 3.1 percent while Over Night rates declined 0.2 percent to 3.5 percent by the end of Tuesday’s trading session.

However, OBB and ON rates rose 0.2 percent and 0.3 percent to 3.3 percent and 3.8 percent on Wednesday consequent on Deposit Money Bank’s FX provisioning, rising to 3.6 percent and 4.2 percent at the end of Thursday’s trading session. As expected, there was a T-bills maturity of about N150.6 billion on Thursday but the impact of this on liquidity was offset by a rollover of the same net amount. OBB and ON settled at 3.6 percent and 4.1 percent on Friday, up 0.5 percent and 0.4 percent Week-on-Week (W-o-W.)

In the T-bills market, average rate started the week 0.1 percent higher than last week’s average closing rate of 8.2 percent. There was a T-bills auction on Wednesday where N45.2 billion, N23.4 billion and N82 billion worth of the 91-days, 182-days and 364-days T-bills were issued at stop rates of 8.0 percent, 9.0 percent and 11.1 percent. Consequently, average T-bills rate rose to 8.4 percent by the end of Wednesday’s trading session. However, average T-bills rate declined 0.1 percent to 8.3 percent by Thursday, eventually settling at 8.1 percent, down 0.1 percent W-o-W.

In the week ahead, barring any unexpected mop-ups, we expect money market rates to move in tandem with market liquidity dynamics as dictated by the foreign exchange provisioning by DMBs and refunds by the CBN, as well as OMO maturities and auction (about N32.0bn expected to hit the system next week Thursday).

Source: Vanguard