Curious demand for dollar depreciates naira, closes N420/$

… As global demand for crude oil continues to decline

What analysts see as curious demand for dollar saw the naira plunge to N420 per dollar last week. This is as inflow of dollar continue to slow as demand for crude oil further decline last week.
Analysts see the fall in naira as curious because, according to them, there is little or no business activities in the country, and indeed the entire globe as the lockdown continue to tell on fortunes.

Fatade Oni, an. Investment banker told Blueprint that, what normally drives the strength of currency is normally the theory of demand and supply. “But in this case, demand for dollar should be low since there is uncertainty over the future of global markets and based on the fact that there are little or no business activities to warrant the fall in naira”, he said.
Oni, however added that, perception could also affect the strength of currencies. For instance, he said, when a country’s export is high and has a robust foreign reserve, the perception could sustain the local currency.
But a situation where the main source of foreign revenue is threatened , perception could work against such countries like Nigeria.
Oil price lost for the third consecutive week on the back of declining global demand due to economic lockdown globally. An agreement by major oil producers to reduce global output have failed to lift prices amid low storage concerns which hindered positive response in th global oil market. Following this, Brent crude price declined 11.6 per cent week-on-week (w/w) to $24.8/bbl. while external reserves further moderated 0.1 per cent to $33.6 billion.

At the parallel market, the naira depreciated N14.00 to close at N420.00/$1.00. At the Investors’ & Exporters’ (I&E) Window, the NAFEX rate depreciated N0.33 to settle at N388.78/$1.00. The activity level in I&E Window fell 38.7 per cent to $187.8 million from $306.3 million recorded in the previous week. The Central Bank of Nigeria (CBN) spot rate closed flat at N360.50/$1.00.
The total value of open contracts of the naira at the FMDQ Securities Exchange (SE) FX Futures Contract Market advanced 6.8 per cent ($991.6 million) to $15.6 billion. The MAY 2021 instrument (contract price: ₦391.20) received the highest subscription of $195.9 million which took total value to $196.8 million. On the other hand, the JAN 2021 instrument (contract price: N390.26) recorded the least subscription of $7.1 millionwith a total value of $25.4 million. The prospect of higher oil prices remains weak due to the impact of COVID-19, thus we expect sustained exchange rate pressures.
The Open Buy Back (OBB) and Overnight (OVN) trended higher despite elevated System liquidity. System liquidity opened the week robust, albeit lower at N680.1 billion from previous close of N762.1 billion as OBB and OVN inched higher to 2.0 per cent and 2.7 per cent respectively.
On Tuesday, rates marginally declined to 2.0 per cent and 2.6 per cent as system liquidity increased to N827.2 billion. On Thursday, system liquidity rose to N1.1 trillion following Open Market Operations (OMO) maturities worth N226.8 billion, resulting in OBB and OVN declining to 1.9 per cent and 2.0 per cent respectively. Finally, OBB and OVN rose significantly to 20.3 per cent and 21.1 per cent to close the week as system liquidity fell to N550.3 billion.

On Wednesday, the CBN conducted OMO auction worth N100.0 billion but issued a total of ₦112.7bn across three tenors. The 89-day (Offer: N10.0 billion; Subscription: N64.1 billion; Sale: N20.4 billion), 180-day (Offer: N10.0 billion; Subscription: N33.5 billion; Sale: N11.5 billion) and 341-day (Offer: N80.0 billion; Subscription: N226.2 billion; Sale: N80.8 billion) instruments were oversubscribed at 6.4x, 3.4x and 2.8x with marginal rates of 11.50 per cent, 11.54 per cent and 12.71 per cent respectively.
In the treasury bills secondary market, the performance was bullish as average yield across benchmark tenors trended lower, down 22 basis points (bps ) w/w to close at 2.8 per cent. During the week, average yields across instruments fell, especially at the medium and long-end of the curve. The long-term instrument enjoyed the most buying interest as yields declined 85bps to 3.2 per cent while the medium-term instrument fell 10bps to 2.8 per cent. On the other hand, the short-term instrument recorded sell-offs as yield rose 28bps to 2.5 per cent.

In the coming week, we expect inflows from OMO maturities worth N30.7 billion. Also, we envisage that system liquidity will remain elevated, driving rates lower in the secondary T-Bills market.
The bullish sentiment persisted in the domestic market last week as average yield slipped 59bps w/w to 10.23 per cent. Performance tilted in favour of the bulls as market recorded gains on four of five trading days. On Monday, average yield reduced 7bps while Tuesday’s performance was flat. On Wednesday and Thursday however, yields dived 2bps and 31bps respectively. At the close of the week, average yield dropped 19bps driven by a bullish performance across tenors. While the Mid-term bonds had the best performance as yield fell 84bps, the short and long-term instruments shaved off 19bps and 30bps respectively.
The Debt Management Office conducted a bond auction worth N60.0 billion on the 22nd of April 2020, with equal split among the 3-year, 15-year and 30-year instruments. As expected, the longer dated instrument was oversubscribed at 5.9x while the mid-term and shorter dated assets recorded bid to cover ratios of 5.4x and 2.5x respectively. A total of N156.1 billion was allotted (3 years: N30.1 billion, 15 years: N72.3 billion and 30 years: N53.74 billion) while the closing rates were 9.0 per cent, 12.0 per cent and 12.5 per cent for the 3-year, 15-year and 30-year instruments respectively.

The SSA Eurobond market continues to reel from COVID-19 as average yield jumped 1.5 per cent to close at 14.1 per cent. All 31 instruments under our coverage lost, save the South African 2024 Eurobond whose yield fell 9bps to settle at 4.9 per cent. Similar to the previous week, the Zambian 2022 and 2024 instruments continue to lead the losers as their respective yields jumped 8.5 per cent and 5.6 per cent to 56.8 per cent and 42.8 per cent respectively. Trailing is the Nigerian 2021 instrument with an increase in yield climbed of 4.3 per cent to 14.8 per cent.
The bullish momentum in the African Corporate Eurobonds market persisted as average yield fell 5bps w/w to settle at 8.8 per cent. Overall, 8 of the 20 instruments under our coverage gained. The SIBANYE GOLD 2023 and SEPLAT 2023 assets topped the gainers as their respective yields moderated 2.6 per cent and 0.6 per cent w/w respectively to -7.2 per cent and 16.8 per cent while ESKOM HOLDING 2021 and 2025 instruments led the underperformers as their respective yield jumped 1.4% and 1.3 per cent respectively w/w to settle at 20.3 per cent and 14.9 per cent.

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