Prologue
In recent times, the FX rates have fluctuated consistently to the extent that there is no guaranteed level at which the FX rates can be estimated to settle at each given time. While there have been many speculations on the reasons for the fluctuations and its impact on the economy and individuals, stakeholders have had increased concerns regarding fluctuations in foreign exchange (FX) rates – the rates moving up – and its impact on the economy. Speculators have taken advantage of the Naira’s volatility, buying dollars in anticipation of further depreciation thereby increasing he demand for dollars and driving up the exchange rate.
In the previous week, liquidity remained short all through while the Naira closed at ₦1,497.33 according to data from the Nigerian Autonomous Foreign Exchange Market (NAFEM). The week also saw the disbursement of the ₦1.208 trillion Federation Account Allocation Committee (FAAC) allocation. Conversely, it is speculated that the rise in the FAAC allocation is also believed to be responsible for fuelling FX and inflation.
Nigerian Financial Markets
Many are of the opinion that the dollar-naira tussle is locally-influenced. However, we at Marina Times believe that it stems from foreign investors’ participation in the market. The idea is this: when foreign investors withdraw their investments from Nigeria, it increases the demand for dollars as they convert their naira holdings back to their home currency, depending on the extent, leading to the depreciation of the Naira. In addition, when foreign investors bring capital into Nigeria, it increases the supply of dollars in the market, which can help stabilise or appreciate the Naira. Investors and policymakers are closely monitoring these movements, following their effect on investments and economic stability. Some of the reactions we expect include strategic adjustments, hedging strategies, or advocacy for policy interventions to mitigate risks and encourage stability in the FX market.
Similarly, while the interest rates keep climbing on different occasions, many speculate that rates would remain high with no foreseeable timeline as to when they would fall. As interest rates continue to climb, consumers and businesses are facing heightened borrowing costs, potentially leading to a fall in spending and investment. We opine that while yields in the secondary bond market have been reducing, regulators are likely to keep interest rates high to manage inflation and stabilise the economy. The elevated rates are intended to control consumer and business spending, thereby reducing inflationary pressures.
Investors are reassessing their portfolios, favouring assets like bonds with higher yields while applying a cautionary approach to taking-on equities due to increased borrowing costs and the potential profit squeezes. In the equities markets, we believe that it is an advantageous time for investors to carefully select entry points into the markets. Since the beginning of the year, the Nigerian Stock Exchange (NSE) has experienced notable performance, primarily driven by increased domestic investor participation and favourable economic policies. The NSE All-Share Index has seen significant gains, partly due to the removal of fuel subsidies and the unification of exchange rates, which boosted market confidence and investor sentiment.
The FGN Bonds auction for May featured the reissuance of the April 2029 (5-year bond), the February 2031 (7-year bond) and a new issue of the May 2033 (9-year bond). The opening rates for the April ’29 and the February ’31 was 19.3000% and 18.5000% respectively, compared to 19.8900% that was recorded for the May ’33. With a total offer amount of ₦450 billion across all tenors, the subscription spanned over ₦550 billion across all tenors with a total allotment amount of over ₦320 billion. At the auction, the stop rate declined by 1bp (0.01%) for the April ’29 to close at 19.2900% and 1bp (0.01%) for the February ’31s to close at 19.7400%. The DMO seems to have taken many speculators by surprise. Many who made speculations before the auction felt it was going to close at a round figure ending with ‘0’ or ‘5’ as has been the case in quite a number of auctions.
Alternative Assets
The appointment of a new Director-General (DG) for the Securities and Exchange Commission (SEC) in Nigeria signifies a potential shift towards more comprehensive regulations in the cryptocurrency market. It is worth noting that the new SEC DG has prior experience as the Director for the Nigerian Capital Market Institute, as such, there is an expectation on the SEC DG to introduce measures and policies aimed at ensuring best practices and a conducive environment for participants in the crypto market while fostering regulatory oversight and investor protection.
One area where the new SEC DG may focus on is prioritising the development of robust regulatory frameworks tailored to the unique characteristics of cryptocurrencies. This could involve establishing licensing requirements for cryptocurrency exchanges, implementing anti-money laundering (AML) and know-your-customer (KYC) regulations, enforcing compliance with securities laws. By imposing regulatory standards and oversight, the SEC can instil confidence in the integrity and reliability of the cryptocurrency market, thereby attracting institutional investors and triggering market growth.
In the global market, Bitcoin has broken its six-week losing streak by climbing to $67,000 on Friday. This upward trend can be attributed to several factors, namely, increased accumulation activity, with significant inflows to accumulation addresses and a decrease in BTC deposits to exchanges, indicating a strong holding sentiment among investors. These have encouraged a reduction of sell-off pressure and have supported price stability.
Additionally, the recent Bitcoin halving, which cut the block reward from 6.25 to 3.125 BTC, has also contributed to the price increase by limiting new supply. Historically, halving events have been associated with price increases.
Commodities
The stability in oil prices at present may soon be disrupted by escalating tensions fuelled by Israel’s actions, which aim to maintain heightened geopolitical pressures in the region. Geopolitical unrest, particularly in oil-rich regions, have been a significant driver of oil price volatility. With Israel’s stance likely to exacerbate regional tensions, market sentiment could shift, leading to a downward pressure on oil prices in the foreseeable future.
While Gaza and Israel are not oil producers, their geopolitical actions significantly impact regional stability, which in turn affects global oil prices. Actions by Israel considered tension escalating could force other Arab nations to join the conflict, leading to increased instability in the Middle East. This would likely disrupt oil markets, cause price volatility and uncertainty in both the short and long term.
What Lies Ahead
As the Monetary Policy Committee (MPC) convenes today and tomorrow, market participants are closely monitoring the Central Bank’s actions. Anticipation surrounding the MPC meeting has heightened uncertainty among investors and lenders, prompting adjustments in interest rate expectations.
Moreover, there are concerns that the CBN might act prematurely to raise interest rates in response to perceived inflationary pressures or external factors. However, it is crucial for the Central Bank to carefully assess economic indicators, inflation trends, and the overall macroeconomic environment before considering any adjustments to interest rates.
Market expectations are for no hike or minimal hike at the MPC meeting, while we agree with this position, the MPC may be aggressive in its mandate to control inflation and stabilise the Naira with inflation remaining high and the Naira depreciating.
