Inter-bank rates to moderate on back of CBN policy against FX speculation

 

Naira pressure to continue into new year

Inter-bank rates are expected to moderate this week following the Central Bank of Nigeria’s (CBN) recent policy which barred banks from using their funds to speculate on foreign exchange.
The CBN last week introduced a demand management tool, informing dealers that funds purchased from banks by their customers at the autonomous/inter-bank FX market must be utilised within 48 hours from date of purchase.

“We expect this to have a knock on effect on the money market, boosting liquidity and moderating rates on money market instrument”, analysts at Afrinvest have said.
They anticipate that rates will moderate further and trade within the 10.0%-20.0% band. The analysts’ expectation is hinged on T-bills maturity inflow anticipated on Thursday. Liquidity levels in the money market opened last week tight with an opening balance of N96.9 billion on Monday. This is on the back of the hawkish posture of the CBN which has constrained liquidity in the market, a position broadly aimed at maintaining exchange rate stability given the volatility of the naira over the past 3 months. As a result, rates at the interbank market rose at the beginning of the week across instruments.

The OBB and O/N rates rose 24.3% and 28.0% from Friday to close 42.5% and 47.1% on Monday, whilst rates rose on average across NIBOR instruments by 232bps to 21.6%. Rates further inched higher on Tuesday following cash withdrawals from the system by the NNPC, bringing the OBB and O/N rates to close at 72.3% and 75.9%. Liquidity pressure, however, eased towards the end of the week as some liquidity constrained DMBs rediscounted their positions in treasury bills securities before maturity, a situation which boosted liquidity and normalised borrowing rate amongst banks. Thus, the OBB and O/N rates moderated to 16.0% and 17.5%, respectively, on Thursday. W-o-W, the average NIBOR declined 319bps to 16.1% on Friday.

However, whilst the cocktail of policies introduced could potentially weed out speculative demand for the greenback, analysts expect the pressure on the naira to build into the new year.
“Our expectation is based on the observed trend of FX demand pressure during the yuletide season, and the looming 2015 general elections”, Afrinvest analysts said.
The central bank offered and sold US$400 million and US$399.91 million at her bi-weekly RDAS auctions last week, US$50.2 million higher than the amount sold previous week at marginal rate of N168.00/US$1.00. The naira opened the week strong, appreciating 85 kobo on Monday to close at US$178.75/N1.00.

Pressure on the local unit, however, resumed afresh on Tuesday due to heightened demand for the greenback on the back of the anticipated closure of the official RDAS market for the year by the CBN. This created incentive for dealers to speculate on the naira on expectation of imminent dollar scarcity and a weaker naira.

Against this backdrop, the naira weakened N1.95 to close at N180.70/US$1.00 on Tuesday and depreciated further by N6.40 on Wednesday to close at a record low of N187.10/US$1.00 after the CBN closed the RDAS market.
To halt the speculative activities, the CBN released a circular on Wednesday, paring the foreign exchange trading position of authorised dealers at the close of each business day to 0.0% of shareholders fund from 1.0%.