Forex, T-Bills account for 53% of FMDQ OTC 8-month turnover

Fifty-three percent of FMDQ OTC deals carried out  in the first eight months of the year are attributable to rising demand in foreign exchange (forex) and treasury bills (T-Bills) transactions, data from the Financial Markets Dealers Quotations sampled by BusinessDay show.

The increased demand for forex was caused by the tendency of Nigerians to hold onto forex in response to fears of the possibility of crisis around the 2015 elections, while higher yields on T-Bills were said to be responsible for the increased interest in the financial instrument.

The implication is that as the elections draw nearer, the nation’s currency, the naira, which has lost about 3.5 percent year to date, will witness more depreciation.

Analysts say the uptick in the volume of deals in T-Bills and forex has made the money market competitive, with individuals and corporate institutions investing in the instruments, while the beehive of activities in the forex market was due to increased demand so as to hedge against the depreciation.

Consequently, in the eight months to August 2014, out of N56.954 trillion worth of deals recorded across various products traded at the FMDQ OTC market, T-Bills accounted for N15.952 trillion, forex accounted for N14.880 trillion, while money market (repurchase agreements/buy-backs) accounted for N14.757 trillion.

Analysts believe that in the run-up to elections, strong signals of monetary policy tightening and inflation pressure reinforce investor appetite for higher yield.

“Given rising demand for FX (which may be partly due to election spending), increasing foreign portfolio outflow and weak FX earnings from crude oil export, the local currency may remain under pressure in the week ahead,” said analysts at Associated Discount House Limited.

In the review eight-month period, foreign exchange derivatives accounted for N3.168 trillion, FGN bonds accounted for N4.495 trillion, other bonds (N209.951 billion), unsecured placements/takings (N3.465 trillion), and money market derivatives (N24.490 billion).

FMDQ OTC collates data from the weekly trade data submissions by FMDQ dealing members, and it represents trades executed between dealing members, dealing members and clients, and dealing members and the Central Bank of Nigeria (CBN).

Other products traded on the FMDQ secondary market include unsecured placements/takings, bonds (FGN bonds and other bonds), and FX and money market derivatives.

Amid high interbank market liquidity, the fixed income market remained bearish prior to the public holidays, with notable sell-off on treasuries and bonds. Analysts observe that overall yields on treasuries rose an average of nine basis points (bps), with relative concentration on the mid- and long-dated maturities.

“Whilst we look forward to mild recovery in demand for treasury bills in the week ahead, as yields become competitive to money market rates, the broad negative sentiment will moderate potential price gain on treasuries,” noted analysts at Associated Discount House Limited.

“The sell-off was pronounced in the bond market as reflected in the average 22bps rise in yield. Even so, the pressure was broad-based, the three-year benchmark (13.05 percent FGN AUG 2016) was the most vulnerable to the volatility in the market, with the yield on the Note rising 39bps (or N0.65 in price term),” they added.

This week, the CBN will auction T-bills worth N131.83 billion. Last week, the apex bank auctioned T-bills worth N170 billion via open market operation (OMO). T-bills worth N282 billion matured via OMO.

“In the absence of major inflows, we anticipate a net deficit in financial system liquidity and a resultant increase in interbank rates,” analysts at Cowry Asset Management said ahead of the auction.