CBN suspends activities at forex market till end of lockdown … As backlog of forex demand piles

The additional two extension on lockdown as a result of the COVID-19, means the Central Bank of Nigeria (CBN) cannot participate in activities at the foreign exchange (forex) market, save its skeletal services it is running at the Import and Export (I&E) window.
The apex bank has been forced to stopped sales of forex since March 20, 2020. If the lockdown continues after April 28, then, demand for forex will continue to pile.
The CBN spot rate traded flat last week to close at N361.00/US$1.00 while at the parallel market, rate opened at N415.00/$ and depreciated N1.00 to close at N416/$. At the Investors’ & Exporters’ (I&E) Window, the NAFEX rate appreciated 50 kobo to close at N386.13/$. Activity level in I&E Window declined this week as total turnover plunged 75.8 per cent to $83.2 million from $343.6 million recorded in the previous week.
Some analysts consider it a saving grace that demand for forex is put on hold, otherwise, the dwindling crude oil prices in the niter national markets would have punched a hole in the country’s reserves. This is because, oil price remains depressed despite production cut announcement.
Following the conclusion of the OPEC+ meeting last Sunday, the price war between Saudi Arabia and Russia was resolved while OPEC+ and Non-OPEC members reached a production cut agreement. For an initial period of 2 months starting from May 1st, 2020 oil production would be cut by 9.7mb/d and 7.7mb/d for a subsequent period of 6 months to December 31st, 2020. There was a positive reaction to this development initially as Brent crude price rose to $31.7/bbl, however, oil price plunged through the week, down to $28.3/bbl. on Friday. Domestically, the external reserves fell 1.7% w/w to US$33.9bn (4/15/2020).
At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts settled at US$15.1bn, 0.6% (US$15.0bn) higher than the prior week. The Apr 2021 instrument (contract price: ₦393.01) had the most buying interest in the week with additional subscription of US$22.5m which took total value to US$176.5m. Meanwhile the Aug 2020 instrument (contract price: ₦389.35) was the least subscribed with sell-offs worth US$1.3m putting the total value at US$800.9m. We expect the Naira would continue trading at similar bands in the week ahead.

Bearish sentiment in theTreasury Bills market
Last week, the the Open Buy Back (OBB) and Overnight (OVN) rates opened lower at 2.3 per cent and 2.8 per cent respectively from the close of 15.0 per cent and 15.8 per cent last week as system liquidity rose to N686.9 billion. On Thursday the rates fell to 2.0 per cent and 2.7 per cent as inflows of N195.0 billion from maturing the Open Market Operations (OMO) instruments hit the system. By the close of the week, the rates stood at 2.0 per cent and 2.3 per cent as system liquidity remained robust at N762.1 billion.
The CBN conducted Primary Market Auction (PMA) on Wednesday as scheduled, offering treasury bills instruments worth N58.4 billion (91-day – N5.8 billion, 182-day – N3.5 billion and 364-day – N49.1 billion). The 91-day, 182-day and 364-day instruments were auctioned at discount rates of 1.9 per cent, 2.7 per cent and 4.0 per cent respectively, lower than rates in the previous auction (2.2 per cent, 3.2 per cent and 4.3 per cent respectively). However, we note higher subscription levels, especially for the mid-dated instrument at 3.6x while the short and long term instruments were oversubscribed by 2.4x and 2.2x respectively. Also, on Thursday, the CBN conducted an OMO auction to mop-up liquidity, offering N100.0 billion worth of OMO instruments across three maturities. In contrast to last week’s auction where there was no subscription nor sale at the short and mid-end, the auction recorded high subscription levels at 3.2x, 3.6x and 1.1x for the 82-day, 166-day and 334-day instruments respectively. The apex bank sold instruments worth ₦134.0bn at marginal rates of 11.5 per cent, 11.54 per cent and 12.75 per cent for the short, medium and long term instruments respectively.
In the secondary market, performance was bearish as average yields across tenors rose 12bps w/w to 3.1 per cent from 2.9 per cent as investors sold-off to partake in the auctions. The highest sell-off was recorded at the long end of the curve as yields increased by 61bps to 4.0 per cent to match the rates at the auction. Yields also rose at the short end by 5bps to 2.2 per cent while mid-term yields declined 31 basis points (bps) to 2.9 per cent.
Analysts at Afrinvest anticipate that inflows from maturing OMO instruments worth N267.7bn coupled wth elevated liquidity levels to determine the movement of rates. However, we expect CBN to keep rates and system liquidity in check through regular auctions.

Bond market rally ahead of FGN Bond auction
Last week, the domestic bonds market sustained its bullish momentum as average yield declined 31bps week-on-week (w/w) to 10.8 per cent. The trading session kicked off on Tuesday with average yield falling 5bps due to gains on short tenor bonds. On Wednesday, average yield was flat before declining further by 20bps on Thursday following the Debt Management Office’s (DMO’s) plan to offer N60.0 billion in April’s FGN Bond Auction. On Friday, yield fell marginally by 2bps to close the week. The medium-term instruments recorded the most buying interest, down 37bps w/w. Likewise, the long-term and short-term instruments gained, declining 22bps and 9bps w/w.
At the SSA Eurobond market, the bearish performance was sustained as average yield rose 51bps w/w to 12.4 per cent. The Zambian 2022 and 2024 instruments recorded the most sell-offs as yields inched higher by 4.6 per cent and 3.3 per cent respectively. On the other hand, the South African 2024 and Ghanaian 2029 instruments posted gains, trimming 36bps and 35bps respectively.
For the African Corporate Eurobonds under our coverage, the bullish momentum continued as average yield fell 29bps w/w to 9.2 per cent. The NEEG ENERGY 2022 recorded the best performance as yield dipped 5.9 per cent w/w, trailed by ESKOM HOLDING 2025 with yield falling 1.9 per cent w/w. On the other hand, FIDELITY 2022 and UBA 2022 led laggards as yield rose 5.6 per cent and 4.3 per cent w/w respectively.
In the Eurobond market, Afrinvest analysts expect developments surrounding COVID-19 pandemic and crude oil prices to shape performance.

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