Nigeria’s financial markets experienced a week of turbulent activity, marked by rising yields, increasing liquidity tightening, and shifting sentiments. As local and international players grappled with these dynamics, the Central Bank of Nigeria (CB) took a series of measures to address the evolving economic landscape.
FX Market Dynamics and Central Bank Actions
The foreign exchange (FX) market saw total turnover amounting to $503.95 million last week, with Friday’s turnover registering at $98.82 million. Year-to-date, volumes traded at the NAFEM window have reached approximately $21.005 billion. This surge in trading activity was primarily driven by local market participants seeking funds to fulfill their outstanding obligations.
One noteworthy development occurred on Wednesday when the CB fulfilled a portion of the outstanding matured FX forward from the Retail Special Market Intervention Sales (SMIS) auction. The exact total of this clearance is yet to be confirmed, but experts believe it represents a significant step in enhancing overall market confidence and optimism.
In addition to these actions, the CB conducted two Open Market Operations (OMO) auctions last week, with the 1-year tenor yielding a notable 17.98% discount rate. This move piqued the interest of some offshore market players, as discussions and a few sales transactions were observed on the side of the offshore participants.
The week’s highest traded rate reached $1,101 to $1 on Wednesday, showcasing the market’s fluctuating conditions. Indicative quotes provided by market participants varied between N800.00 to $1 and N1,100.00 to $1, with the NAFEM closing rate concluding at N776.14 on Friday. On the same day, the highest and lowest rates traded were N1,100.00 and N700.06, respectively. The NAFEX fixing rate ended lower by N57.45, declining from N837.68 the previous day to N780.23.
Monetary Policy Actions and T-Bill Market
The CB adopted a tightening stance on Naira liquidity last week by debiting NGN758 billion in Cash Reserve Requirements (CRR) while simultaneously issuing NGN477 billion in high-yielding OMO bills. This combination, along with the earlier removal of placement limits on banks’ Standing Deposit Facility (SDF) limits, led to elevated Naira funding rates, which opened at 15% and continued to trend upwards during the week.
In response to these developments, sentiment in the Treasury-bills (T-bills) market turned net bearish, with limited trading activity in the secondary markets as banks sought to meet their demands mainly through OMO auctions. The CB conducted two auctions, selling a total of NGN477 billion, with the 1-year tenor reaching a high of 17.98% discount rate.
Fixed Income Market
The bonds market opened the week on a bearish note, with bond yields rising across the curve, especially for the actively traded 2053 bonds. Selling pressure intensified as the CB held two OMO auctions, further reinforcing the tightening stance and increasing volatility in the bonds market. Bond yields expanded by an average of 150 basis points across the curve, leaving traders grappling with the shifting dynamics.
Looking ahead, experts anticipate that funding levels will remain at high double-digit levels, with the CB continuing to sterilize liquidity through the OMO and CRR windows. The bearish trend in the T-bills market is expected to persist.
Bottom Line
Nigeria’s financial markets have had to navigate choppy waters characterized by rising yields, tightening liquidity, and shifting sentiments. The CB’s actions aimed at stabilizing the FX market and implementing monetary policy measures to manage liquidity have shaped market conditions, leaving both local and international participants adapting to the evolving landscape. As economic conditions continue to change, market participants will closely monitor the central bank’s responses and adapt accordingly.
