Naira remains calm on CBN’s FX sales, as bulls rule T-bill market

Last week, the apex bank sustained its intervention in the Foreign Exchange (FX) market, with the aim of keeping the Naira stable.

On Tuesday, 16th of July 2019, the Central Bank of Nigeria (CBN) sold a total of $210.0 million in the FX market: $100 million in the wholesale segment of the market and $55 million each in the Small and Medium Enterprises (SME) and the Invisible segments. The external reserve level slightly moderated by $15.8million to settle at $45.0billion (17th of July 2019). 

Compared with the previous week, the CBN rate opened the week at ₦307.00/$ (11th of July 2019) and closed the week stronger at ₦306.95/$ (18th of July 2019), gaining five kobo while the parallel market rate closed flat at ₦360.00/$ (18th of July 2019). The NAFEX rate at the investors’ and Exporters’ (I & E) FX Window opened the week at ₦360.76/$ (11th of July 2019) but closed the week at ₦361.62/$ (18th of July 2019), losing 86 kobo. Activity level at the I & E Window surged as turnover rose by 93.5 per cent to settle at $167.1million (18th of July 2019) for the week.

The total value of open contracts at the FMDQ OTC futures contracts further improved by $93.0 million to settle at $9.8 billion this week, following bullish sentiments across board as investors took position mostly in the July 24 2020 futures contract which gained $27.5million, making it the contract that increased the most.

Due to monetary easing across the global economy, we expect sustained foreign portfolio investment which would support accretion to the foreign reserves. This would in turn help the CBN to sustain its intervention and ensure that exchange rates remain stable across FX windows.

The Open Buy Back (OBB) and Overnight (OVN) rates opened the week at 2.7 per cent and 3.4 per cent respectively, higher than last week’s close of 2.2 per cent and 2.9 per cent due to reduced system liquidity. Following Thursday’s OMO auctions, OBB and OVN rates trended higher to close at 6.3 per cent and 7.0 per cent respectively with system liquidity settling at N387.4billion. By the end of the week, OBB and OVN rates both surged 9.7 ppts W-o-W higher at 11.9 per cent and 12.6 per cent respectively.

In line with its schedule, the CBN conducted Primary Market Auction (PMA) on Thursday, offering instruments worth N107.0bn, receiving total subscription of N473.5 billion and selling N107.1billion across all tenors.

The sale was at stop rates of 9.74 per cent, 10.75 per cent and 11.139 per cent, showing a sharp decline when compared with previous auction rates of 10.50 per cent, 11.70 per cent and 11.91 per cent for the 91, 182 and 364-day instruments respectively.

The CBN also conducted an Open Market Operation (OMO) auction worth N75.0billion on Thursday, slightly above the same day’s OMO maturities of N71.9 billion. As a result of the relatively attractive yields at the auctions, there was strong investor interest across tenors as the 91-day (Offer: N10.0billion; Subscription: N41.2billion), 182-day (Offer: N15.0billion; Subscription: N56.4billion) and 364-day (Offer: N50.0billion; Subscription: N377.5billion) instruments were all oversubscribed at 4.1x, 3.8x and 7.6x respectively. The OMO instruments were issued at marginal rates of 11.4 per cent (91-day), 11.84 per cent (182-day) and 12.25 (364-day).

In the secondary market, there was a sustained bullish performance as rates across maturities slid 56 basis points (bps) W-o-W lower to 10.2 per cent. The weaker bullish momentum is consequent on softening demand following the OMO announcement and eventual auction by the CBN. The 91-day instrument enjoyed the most buying interest as yields declined 89bps to 9.17 per cent while the 182- and 364-day instruments also declined 38bps and 44bps to 10.3 per cent and 11.1 per cent respectively.

In the coming week, it is expected that the CBN will guide rates through interventions as inflows are anticipated from OMO instruments worth N90.0billion.

It is also expected that yields in the T-bills market to remain relatively stable on the back of the large number of unsuccessful bids in the last OMO auction and more attractive yields on short-term bonds of equivalent terms to maturity.

The Debt Management Office (DMO) released the FGN Bond Issuance Calendar for the third quarter of 2019 during the week. From the calendar, the DMO plans to offer between N360billion and N480billion for 5, 10 and 30-year bonds, N120billion above its offer in the second quarter of 2019 (N255billion – N345billion).

“We expect issue price to be high on reopened bonds due to the low yield environment”, said Afrinvest.

Last week, activities in the domestic bonds market were bullish as average yield across term structure declined 26bps W-o-W to 13.4 per cent. The market was bullish on Monday (-8bps), similarly on Tuesday (-10bps) as investors’ re-invested coupons and also on Friday (-13bps) due to renewed buying interest. There was a flattish performance on Wednesday as investors stayed on the sidelines following the release of the third quarter of2019 bond issuance calendar and on Thursday, sell pressures drove yields southward. The short and long-term bonds witnessed the most buying interest during the week, shedding 77bps and 25bps respectively. The medium-term bonds recorded weaker demand as average yields declined 2bps.

The bullish streak in the sovereign Eurobonds market continued this week, leading to a decline in yields W-o-W for instruments under our coverage. The Zambian 2022 and 2024 Eurobonds enjoyed the most buying interest with yields falling 196bps and 185bps respectively. Trailing closely was the Ghanaian 2049, Nigerian 2049 and Kenyan 2048 instruments which declined 84bps, 79bps and 77bps respectively W-o-W.

In the corporate Eurobonds space, the bullish momentum persisted as yields declined across all instruments. The EBN Finance 2021 instrument enjoyed the least demand, paring 29bps W-o-W following its recall announcement. The SEPLAT 2023 and FIDELITY 2022 instruments enjoyed the most buying interest as yield dropped 71bps and 69bps W-o-W respectively. We expect the market to remain bullish in the coming week due to sustained interest from foreign investors in search of high yielding emerging markets assets.

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