The stability in foreign exchange (FX) seen running for about three weeks is expected to continue this week following the monetary tightening measures of the Central Bank of Nigeria (CBN).
The CBN after the Monetary Policy Committee (MPC) meeting last week, increased the Monetary Policy Rate (MPR) upwards by 100bps from 11.0 percent to 12 percent, narrowed the asymmetric corridor around the MPR from +200/-700bps to +200/-500bps, raised the Cash Reserve Ratio (CRR) from 20 percent to 22.5 percent, and kept the Liquidity Ratio (LR) unchanged at 30 percent.
Analysts say the impression the MPC’s decision gives is that the tightening was aimed at preventing even more FX pressure on the parallel market.
Last week, the FX market witnessed exchange rate stability following accruals to the FX reserves.
The FX reserves increased w-o-w by 0.06 percent to $27.89 billion as of Monday. This followed appreciation in OPEC’s average reference basket crude oil price, which rose w-o-w by 3.41 percent to $36.38 a barrel as of Wednesday, March 23.
Consequently, the naira appreciated against the dollar at both the Bureaux De Change and parallel market by 0.93 percent and 0.62 percent to N320/$ and N323/$, respectively. In addition, CBN clearing rate and interbank exchange rate remained stable at N197/$ and N199.10/$, respectively.
This week, “we anticipate sustained stability in the FX markets against the backdrop of recent restrictive monetary policy measures,” analysts at Cowry Asset Management Limited said.
“We believe the interbank market has significantly adjusted for the MPC rate hike and barring any unexpected OMO mop-up from the system. We expect rates to continue to stay at current levels at market close next week. However, we expect rates to fluctuate to liquidity dynamics during the week as deposit money banks provision and get refunded for FX intervention,” Ayodeji Ebo, head, investment research, Afrinvest, said.
The bonds market was broadly bearish last week with yields rising week-to-date across all benchmark tenors in reaction to the eventual lift-off of the CBN’s monetary policy tightening cycle. On Monday, average yields initially dropped 8bps on average to 11.3 percent as the market lowered expectations of a tightening by the MPC in line with consensus estimates.
Yields retraced modestly on Tuesday, as investors anticipated the outcome of the MPC meeting with selloffs in short- to mid-term bonds, while average yields climbed 6bps. As a result of the decision of the MPC to increase MPR to 12 percent from 11 percent on Tuesday, the bonds market caught the buzz as average yields across benchmark bonds moved northwards by 0.4 percent to settle at 11.7 percent with increased activity observed on the FGN JAN2026 and FGN JUL2034 bonds.
There was bargain hunting on Thursday, as the market recovered from the initial knee-jerk reaction leading to a 19bps average contraction across tenors to 11.5 percent; however, still up 19bs increase WTD.
With the bonds market providing a safe haven for risk-averse investors amid current macroeconomic circumstances, “we expect demand for bonds instruments to remain high despite the tightening of policy. However, the market could see further upward correction in yields, depending on the pace of fiscal borrowing for implementation of the budget,” Afrinvest said.
