Return of naira sales beat returns on other assets —Investigation

A money market insight carried out by the Nigerian Tribune has shown that Naira could be sold in the spot market to earn a better return relative to some other investments including risk free assets like Treasury-Bills.

At the Interbank spot market, the naira closed at N316.55 to US$1.00 Friday (19th August 2016). At the parallel market,it closed the week at N397.00/US$1.00 though traded at N395.00/US$1.00 in certain street locations.

The spot rate was therefore estimated to be a 20.3per cent discounts to parallel market rates(difference of N80.45) and also higher than 12-month treasury (T)-bills discount yield of 18.1 per cent.

The implication of this according to investment securities experts is that the naira could be sold in the spot market to earn a better return relative to risk free assets like T-Bills.

According to the experts, this means that either the true value of the naira is yet to be found or that interest rate increase did not help cover the risk of fluctuations in the value of Naira to dollar.

“This suggests two things, exchange rate is either yet to be appropriately priced in the interbank market or interest rate does not compensate for exchange rate risk. The CBN appears to be comfortable with the second explanation hence the gravitation towards aggressive liquidity tightening to force shorter term rates higher and attract foreign capital,” experts at Afrinvest securities house explained.

To compensate for the foreign exchange (FX) risk, the CBN’s FX futures contracts are being priced below market rate (taken as tradeable forwards contracts price) while the Apex bank continues to intervene in the FX spot market to guide Naira trading band they explained.

Despite the negative impact of higher interest rate on consumer and real sector investment decisions, the economy appears to be a lot more sensitive to FX stability than it is to increase in interest rate.

The investment securities firm also recalls that robust Gross Domestic Product (GDP) growth figures recorded in the last era of aggressive policy tightening (between 2011 and 2012) further supports this.

“This explains the willingness of the CBN to take a gamble on tightening policy to attract portfolio inflow, with the expectation that feedback on growth will be limited.

“However, we note that engendering investor confidence in the economy by coordinated and consistent fiscal and monetary actions is much more important in ensuring a fair pricing of exchange rate. “Monetary policy might however stay tight in the shorter term but we expect a more accommodative regime before second half of 2017,” Afrinvest experts urges in a note to investors.

Dealers said investors continue to show more interested in shorter term treasury instruments due to higher attractive yields relative to longer tenured instruments. Average T-bills rate opened the week at 17.0per cent,, rose as high as 17.7per cent but eventually closed the week at 18.1per cent. Across the T-bills term structure, 9Month and 12Month tenors remain the most attractive with rates closing respectively at 19.0per cent and 22.4per cent on Friday.