Liquidity mop-up, forex to exert upward pressure on overnight rates

Despite inflow of maturing OMO bills of N240.57 billion offering support to system liquidity, mop-ups by the Central Bank of Nigeria (CBN) and lenders bid to cover for their forex positions would likely exert pressure on overnight lending rate this week, according analysts.

However, analysts say the cushion offered by the OMO maturities would moderate rates movement, which they see would close marginally higher from the close last week.

The overnight lending rate last week fell by 275 basis points week-on-week to 19.75 percent, against previous week’s close of 22.50 percent.

Indeed, system liquidity was buoyant at the beginning of last week, on the back of inflows from the previously recalled Paris Club refunds worth N320 billion, and matured OMO bills of N277.07 billion. Rate expanded towards the end of the week, albeit below the previous week’s high, following outflows for the CBN’s OMO auction of N249.10 billion and retail FX auction.

On the foreign exchange section of the money market, the naira weakened by 0.28 percent at the parallel market week-on-week to close the week at N362 per dollar, halting 20 sessions of flat trades at N360.

The naira had enjoyed stability for a long period thanks to the weekly CBN intervention, last week the CBN sold $210 million as it looks to cushion increased demand pressure on the naira.

The continuous intervention has translated to the depletion of foreign reserves, which depleted further by $489.48 million to $43.35 billion, hitting its lowest level since March.

In a survey of street markets in Ikeja showed that the naira traded flat, as the dollar traded at N361/N362 per dollar and the pound sterling traded at N476, while the Euro traded at N415 to close the week.

At the Bureau De Change (BDC) window, the naira also traded stable at N360 to the dollar and was bought at N358, while the pound sterling and euro closed at N478 and N415 respectively as traders bought the pounds at N470 and the Euro at N405.

In the I&E FX window, the local currency weakened by 0.08 percent to its lowest point N364.12. Similarly at the FX forwards market, the dollar to naira rate weakened across most of the major dated contracts, 1-month (-0.08%), 3-month (-0.02%) and 1-year (-0.12%) dated contracts to N367.71, N374.73 and N410.90 respectively. It however appreciated in the 6-month (+0.02%) contract to N386.21.