Activities in the foreign exchange (FX) market may take a slow pace this week as the financial market awaits the release of the modalities for the flexible interbank market by the Central Bank of Nigeria (CBN).
The pressure on the local currency continued last week after the Monetary Policy Committee (MPC) introduced flexible foreign exchange market with the details of the operations yet to be released.
Analysts at both Cowry Asset Management Limited and Afrinvest Securities Limited believe the FX market will be defined by the expected rollout of the modalities for the operation of a new “Flexible Interbank Market,” which the CBN has promised will be communicated soon.
Activities at the central bank’s official window last week remained low as it retains its clearing rate at N197/$, while the interbank market has yet to experience the liberalisation policy; interbank rate remains tentatively at N199.10/$.
The pressure on the naira intensified at the Bureau De Change (BDC) and parallel (black) market as the local currency recorded further depreciation by 7.55 percent from N342/$ to N347/$ and by 7.76 percent from N347/$ to N350/$, respectively.
Again, the forwards market portends likely future depreciation as the naira weakened by 0.36 percentage, 1.54 percent, 2.40 percent and 0.89 percent to N201.46/$, N207.07/$, N214.10/$ and N218.16/$ for the 1 month, 3 months, 6 months and 12 months contracts, respectively.
“We are strongly of the opinion that the window for critical transactions would create opportunities for arbitrage and abuse as well as fuel further divergence between the official window and the alternative market,” Edgar Ebinum, head, investment research, Cowry Asset Management said.
At the fixed income market, there was moderation in yields at the beginning of the week as investors, who perhaps got a hint on the possibility of no rate hike, took position in medium to long-term bonds instruments. Following the decision of the MPC to retain MPR at 12.0 percent, the bonds market gained traction on Wednesday, as average yields declined from 13.6 percent on Tuesday to 13.4 percent.
But on Thursday average yields further moderated to 13.3percent before closing at 13.7 percent on Friday.
The sovereign bonds yield curve also shifted downwards W-o-W on account of a generally bullish market in which case average yields moderated to 13.7 percent from 14.0percent in the previous week. Our price analysis across term structure of bond yield curve shows that ten bond instruments are still selling at attractive discounts to par value as against only seven instruments that are trading at premium to par.
“We advise investors to continue to consider longer tenured bonds instruments with high modified duration in their portfolio as they tend to offer the highest return in a declining yield environment. To this end, we recommend the 20-year benchmark instruments (JUL-2030, JUL-2034 and MAR-2036), which are currently trading at discount to par values of N78.86, N90.93 and N94.05, respectively,” Ayodeji Ebo, head investment research, Afrinvest said in a report.
