Bullish outlook for naira ahead of CBN rate decision, economic data release

The local currency, the naira, would trade steady against international currencies ahead of Central Bank of Nigeria’s (CBN’s) rate decision and economic data released by the National Bureau of Statistics (NBS) this week, says Lukman Otunuga, research analyst at FXTM.

“The upcoming trading week will offer investors fresh insight into the health of Nigeria’s economy, with both the interest rate decision and GDP data scheduled for release,” Otunuga noted in a note to business a.m., adding that a combination of central bank intervention and rising commodity prices have and would continue to support the local currency.

According to him, the outlook would not only support bullish sentiment but will also boost expectations of the Central Bank of Nigeria cutting interest rates in H2. Equally, analysts at Renaissance Capital (RenCap) have revised their YE18 FX forecast to NGN356/$1, from NGN360/$1, to reflect a stronger naira on the back of an improved external position.

“The naira appreciation is likely to be modest, in our view, because it will be tempered by the continued build-up of FX reserves by the central bank,” he said, adding that during a Eurobond roadshow in November, Godwin Emefiele of the Central Bank of Nigeria (CBN) said he was aiming for $45 billion by mid-2018, which he affirmed when we met him in February; that level was passed in March. FX reserves were at $46.9 billion (30-day moving average) on 13 April; they were last this high in 1H13.

“We also think the CBN prefers a stable FX rate – following significant naira depreciation over the past two years – so it would rather build up reserves than let the currency strengthen.

We still think the naira is cheap at NGN356/$1; its fair value is c. NGN320/$1, according to this analyst’s real effective FINANCE & INVESTMENT FIXED INCOME & MONEY MARKETS Bullish outlook for naira ahead of CBN rate decision, economic data release business a.m. exchange rate model.

We believe a cheap naira will help to contain imports,” they noted. Analysts at Afrinvest say they expect rates to continue to trade within tight bands across different segments of the FX market as they remain confident of the CBN’s ability to sustain its FX interventions as well as steady accruals in external reserves, which currently stand at $47.1 billion. Indeed, the naira has witnessed stability against the dollar in the past weeks.

Specifically, last week the CBN moved twice to keep the country’s foreign exchange market liquid when it intervened in the interbank segment of the market and the Retail Secondary Market Intervention Sales (SMIS) segment with $210 million and $396.18 million respectively.

The central bank said in a statement that the released sum is meant to meet obligations in the agricultural, airlines, petroleum products and raw materials and machinery sectors of the economy.

The CBN spot rate opened last week at N305.60/US$1.00 and remained unchanged throughout the week. Parallel market rates opened the week at N362.00/ US$1.00 appreciating by N1.00 from last Friday.

However, at the close of the week, it fell to N363.00/ US$1.00. At the Investors and Exporters’ (I&E) Window, the NAFEX opened the week flat at N360/US$1.00, the same at the close of the previous week. By Thursday, it had depreciated 25bps to close N360.25/ US$1.00 before closing the week at N360.25/US$1.00.

Activity level in the I&E Window strengthened, inching 10.0% (US$109.3m) higher W-o-W to US$1.2bn from US$1.1bn recorded the prior week. At the FMDQ OTC futures market, a total value of open contracts of the Naira settled OTC futures rose by US$44.6m to US$3.5bn as compared with US$3.4bn posted last Friday which connotes an increase of 1.3% in market size.

The APR 2018 instrument was the most subscribed with a total value of US$660.49 while the MAR 2019 instrument was the least subscribed with a total value of US$31.73. The April 2018 instrument would be maturing in the coming week and in line with the trend, we expect the CBN to replace it with a new instrument. At the international scene, buying sentiment towards the British pound deteriorated sharply last Thursday after dovish comments from Mark Carney, Bank of England’s governor heavily diluted expectations of an interest rate hike in May.

Carney’s cautious tone and his acknowledgement of recent “mixed” economic data, planted a seed of doubt among investors that the central bank will take action next month. With inflation cooling, retail sales disappointing and a dovish Carney entering the scene, Sterling bulls could be in trouble.

The probability of a rate hike in May plunged to below 50 percent (down from 70% before Carney spoke) and this continues to punish the currency, Otunuga noted. “Sensitivity to monetary policy speculation is likely to remain a key fundamental theme impacting the British Pound.

If market expectations continue to deteriorate over higher U.K interest rates, Sterling could be exposed to further downside risks. “Taking a look at the technical picture, this has been a terribly bearish week for the GBPUSD, with prices trading around 1.4060 as of writing. Previous support at 1.4100 could transform into a dynamic resistance that encourages a decline lower towards 1.4000.

If bulls are able to push prices back above 1.4100, the next key level of interest will be 1.4230,” he said. In Turkey, it has certainly been a positive trading week for the Lira, as a surprise announcement of snap elections in Turkey boosted appetite for the currency. President Tayyip Erdogan called an early election for 24 June, creating a sense of optimism among investors that political stability would increase.

The main risk event for the Lira next week will be the Central Bank of the Republic of Turkey’s (CBRT) monetary policy meeting. “There is speculation over a potential rate hike in April, following Erdogan’s call for early presidential and parliamentary polls.

The Lira could receive further support if the CBRT raises interest rates. “From a technical standpoint, the USDTRY remains under pressure on the daily charts, with prices trading around 4.05 as of writing. A failure of bulls to secure a daily close above 4.05 could result in a decline towards the 4.00 level. Alternatively, a weekly close above 4.05 could inspire bulls to challenge 4.10,” Otunuga stated.

Gold depreciated on Friday as easing geopolitical tensions and hopes of higher U.S interest rates dented appetite for the yellow metal. The yellow metal continues to be driven by conflicting fundamental themes and this is reflected in the price action witnessed over recent weeks. While bulls remain inspired by geopolitics, lingering trade war fears and U.S political risk, bears have found support in the form of rising U.S rate hike expectations.

Gold is likely to remain a battleground for bulls and bears until a fresh directional catalyst is brought into the picture. Taking a look at the technical picture, prices could challenge $1360 if bulls are able to keep above $1340. Alternatively, a breakdown below $1340 may result in a decline towards $1324.