In the week under review, the global markets – from crypto to stocks – witnessed extreme challenges at the beginning of the week, especially in the Asian markets. However, as the week progressed, recoveries from dips were observed across the board. The crypto crash saw the Bitcoin trade as low as $49K and as high as $62K before slightly dipping to $60K. Notably, WTI and Brent maintained the $70 levels in the oil market irrespective of the dips.
Recently, many Nigerian banks, if not all, have been actively engaging in what is known as a ‘rights issue.’ A rights issue is a way for companies to raise additional capital by giving existing shareholders the right to purchase new shares at a discounted rate. Similarly, the Central Bank of Nigeria (CBN) announced its plan to issue a domestic dollar bond. There are speculations that this move may attract a significant proportion of the domiciliary account balances in banks.
The Federal Government (FG) also re-introduced the Retail Dutch Auction System (RDAS), leaving market participants and investors puzzled as to the qualification criteria for investors in the domestic dollar bond. Specifically, how will investors source the required US dollars where they hold their funds in naira? Will it be a situation where investors purchase USD from the parallel market (the black market), or will a system to facilitate such purchases be developed? So many questions here, but we will keep you updated.
Liquidity was long throughout the week except for Friday, which was short by over N12 billion. In the FX market, the Naira traded as high as $/N1,628.00 on Wednesday and closed the week at $/N1,574.20
The recent exchange rate adjustment from N1,600.32 to N1,618.73 by the Central Bank of Nigeria (CBN) for clearing cargo at the ports has been recorded as the highest since March 2024; the adjustment in the views of many burdens importers by increasing import costs and contributing to inflation. Despite the CBN’s efforts to stabilise the Naira through foreign exchange sales, the market continues to face challenges. In July alone, the CBN conducted at least three FX sales to authorised dealers and one sale to Bureau de Change (BDC) operators amid significant pressure on the Naira.
The CBN auctioned a little above N216 billion at the just concluded Treasury Bills auction. In the previous auction, the stop rate for the one-year T-Bill reached a record of 22.1%. At the most recent auction, it saw a decline of about 21 basis points, closing at 21.89%, making it the only tenor that decreased. The 91-day and 182-day maintained rates at 18.5% and 19.5% respectively.
The performance at the auction raised questions among market participants as to whether the performance marked the end of the bearish trend, especially since previous auctions had seen rate increases across all tenors. While this could signal the current cycle’s end, we believe the bearish trend may continue. The coming weeks will be crucial in determining the future direction. The indication that DMO had reduced the amount offered at the August bond auction by 36% (from 100bn to 190bn) brought about a major buy trend at the end of the week, particularly on the 2033 maturity. The same auction had also been postponed by a week due to market liquidity constraints.
In a different development, the Central Bank of Nigeria’s (CBN) decision to auction $876 million at an exchange rate of $/N1,495 to clear the retail FX request backlog indicates a focused effort to address the liquidity challenges in the foreign exchange market.
The RDAS is a retail auction system where the Central Bank of Nigeria (CBN) sells directly to clients through banks. Banks are debited the Naira equivalent of USD sold. Although customers have the funds in their accounts, banks may lack sufficient liquidity to cover these transactions, a challenge that complicates settlement, as banks are prohibited from borrowing from the CBN to fund foreign exchange purchases.
Here’s a breakdown of the possible implications and effects of the RDAS:
Implications of the FX Auctions:
1. Addressing FX Demand: The auction seeks to meet the demand for foreign exchange. This effort will certainly help boost transmission in FX supply and consequently stabilise the market.
2. Inflationary Pressure: A higher exchange rate for FX could increase import costs, potentially contributing to inflation; this needs to be managed carefully to avoid exacerbating inflationary pressures, which are already significant. The RDAS auction will impact inflation positively as the reduced cost of funding FX obligations should translate into lower costs passed on to end users.
3. Potentially Lower Yield Pressure: The higher exchange rate could influence investor sentiment and demand for fixed income assets. When the market perceives the forex market as unstable or inflation expectations rise, investors could demand higher yields to compensate for increased risk; this could drive up the stop rates at auctions. In our humble opinion, the sustained sale of significant volumes via RDAS will help douse tension on yields and consequently reduce the cost of borrowing for the Federal Government.
The RDAS auction aligns with broad monetary policy goals of stabilising the Naira and managing liquidity, efforts which complement NTBs and FGN Bond auctions by potentially
creating a more stable environment for those instruments. Successfully clearing the FX backlog could boost investor confidence in the CBN’s ability to manage liquidity and forex rates, which could positively affect demand for NTBs and bonds.
Further to the CBN expressing its commitment to defending the Naira, it is critical to maintain consistency and resoluteness in efforts. This steadfast approach will help address uncertainties, mitigate risks, and ensure that the benefits are fully realised for the advancement of our economy. The CBN’s dedication to these principles will significantly contribute to building a resilient financial environment.
We expect interest rates to remain elevated for the foreseeable future as fiscal and monetary authorities monitor the moderation in exchange rates and inflation. On the global front, Middle East tensions are likely to escalate this week and as a consequence, oil may climb further while equity and cryptocurrency valuations should drop albeit temporarily.
