Last week, dealers from Afrinvest (West) Africa Limited said financial system liquidity opened at N168.1billion. OBB and O/N rose 8.8 per cent and 10.8per cent to close at 28.0per cent and 32.0per cent respectively at the end of Monday’s trading session. The expected Federal Accounts Allocation Committee (FAAC) inflow of about N146.7billion also hit the system on Monday and this impacted opening system liquidity levels on Tuesday.
Consequently, OBB and O/N declined 10.8 per cent and 13.0 per cent to close at 17.2 per cent and 19.0 per cent. By midweek, OBB and O/N rates moderated to 12.2 per cent and 13.4 per cent as liquidity levels improved especially as the weekly FX intervention which used to be a major drag on liquidity had been terminated. OBB and O/N lending rates dropped to single digits at the end of Thursday’s trading session with OBB closing at 4.4 per cent whilst O/N closed at 4.8 per cent on the back of an OMO maturity of N115.0billion. OBB and O/N rates rose 0.1 per cent and 0.2 per cent to close the week at 4.5 per cent and 5.0 per cent, down 14.7 per cent and 16.2 per cent week on week (W-o-W) respectively.
The Treasury Bills market saw renewed buying interest last week and as a result, the average T-bills rate declined on all the trading days of the week. On Monday, average T-bills rate declined 0.4 per cent to 10.7 per cent (from 11.0% on Friday) on the back of renewed buying interest on all the ends of the T-bills curve. Average rate inched even lower on Tuesday to 10.2 per cent as system liquidity improved owing to inflow of FAAC allocation. By midweek, average T-bills rate declined 0.5 per cent to close at 9.7 per cent as buying interest continued, dropping to 9.5 per cent on Thursday as liquidity levels rose as a result of the N115.0billion Open Market Operation (OMO) maturity inflow into the system. Average T-bills rate closed the week at 9.4 per cent on Friday, down 1.7 per cent W-o-W.
Foreign Exchange Review
During the month of June, the Apex Bank released the guidelines for the new FX framework, surpassing consensus expectations. The much awaited guidelines included the adoption of a single FX market structure and the introduction of derivatives products. On the first trading day of the new interbank market, the Apex Bank cleared $4.02billion of pent-up demand accumulated over months at N280/$1. Subsequently, interbank rate tumbled from the pegged N197/$1 to over N280/$1. As it stands, the CBN remains the major supplier of FX even in the new FX market structure as the inflow of foreign capital has not been as swift as expected amidst global & local macroeconomic challenges. In the parallel market, the naira appreciated to a month high of N335/$1 after the announcement of the new FX framework. However, the continued exclusion of 41 items in the accessibility of FX at the interbank market ensured that the parallel market continued to thrive. Consequently, the exchange rate appreciation witnessed in the parallel market relapsed as the naira fell to N345/$1 during the last week in June.
The CBN launched the naira settled Over-The-Counter (OTC) FX futures contract last week by creating US$1.00billion each of 1 to12 month’s contracts. Citi Bank Nigeria Limited executed the first naira settled OTC FX Futures on the FMDQ OTC platform during the week after buying US$20 million worth of naira-dollar April 2017 at N210/$1. The interbank’s spot rate hovered between N281.23/US$1.00 and N281.49/$1. Whilst one-year forward quote rate closed at N317.82/$1 suggesting bearish sentiments in the medium term, one-year futures quote rate issued by the CBN closed bullish at N225/$1. At the parallel market, the naira traded at N347.00/$1 on Monday, depreciated to N355/$1 by midweek and closed the week at N352.00/$1.
Bond Market Review
Activities in the bonds market last week was broadly bullish as average yield across benchmark bonds declined on all trading days amidst buying interest save for Tuesday when yields trended 0.1 per cent northwards. Average yield across benchmark bonds declined 0.1 per cent on Monday to close at 14.4per cent (from 14.5% on Friday) with increased activity observed on the FGN JAN2019 instrument. By midweek, average yield moderated 3bps from Tuesday’s closing levels to close at 14.4per cent.
Average yield across benchmark bonds dropped further on Thursday to 14.0per cent as buying interest increased (especially in the FGN JAN2026 and MAR2036 bonds) on the back of the improved system liquidity effected by the maturing OMO bills, to settle at 13.7pent cent at the end of Friday’s trading session, down 0.8per cent W-o-W.
The impact of the Fitch Ratings downgrade on investor sentiment towards Nigerian sovereign bonds was short-lived as renewed buy interest returned during the week. Consequently, yields dropped across the three Nigerian sovereign Eurobonds, with yields of the FGN 2023, FGN 2021 and FGN 2018 Eurobonds down 0.3per cent, 0.3per cent and 0.4per cent W-o-W respectively.