22 June 2016, Lagos – The new foreign exchange framework, which started on an impressive note, Monday, may have begun to face its first liquidity test — adequate and independent supply of foreign currency to the market.
Dealers, yesterday, said demand appeared to be outstripping supply, a development which forced Naira value to N284/ USD1.00, down from N281.85 it closed on Monday.
Vanguard learned that the expectation of inflow of foreign currency from oil companies and other independent suppliers had not materialized, thereby forcing the Central Bank of Nigeria, CBN, to intervene.
The apex bank had contained the demand pressure in the first trading day of the new policy with a combination of spot and forward market actions where it dolled out about USD4.02 billion to assuage the tasty market. The breakdown of the Monday dollar splash shows that the apex bank sold USD532 million on the spot segment while the balance went to meet the long outstanding demands under the previous forex regime.
The outstanding, totaling about USD3.5 billion, was met in the forward segment, made up of USD697 million in one-month forward, USD1.22 billion in two-month contract and USD1.57 billion due in three months.
But settlement for the forward deals appeared unclear to the dealers as they expected prompt crediting of their dollar account and debiting of Naira equivalent, which has not happened. Consequently, yesterday’s trading session appeared hazy, a development which may have contributed to the depreciation of the Naira.
Meanwhile, a new liquidity pressure has hit the money market following the diversion of huge cash into foreign exchange by banks between Monday and Tuesday, a development which spiked inter-bank interest rate to more than triple.
The interbank overnight rate soared to 60 percent on Tuesday from 18 percent as banks expected the CBN to debit them about N1.15 trillion for the Monday and Tuesday transactions.
They were also said to be amassing more Naira cash for today and future trading days, thereby extending the liquidity strain indefinitely, a development which would bring huge pressure on interest rates.
Such pressure, money market dealers explained, would ultimately spike cost of funds across all segments into prime lending rate if it lingers for days. Vanguard investigations reveal that over N1.5 trillion has been mobilized into the inter-bank foreign exchange transactions in the past two days.
The banks have been amassing cash for the purpose of foreign exchange bids since mid last week when CBN announced the new flexible foreign exchange framework, a development that made banks’ liquidity balances spike 382.5 per cent last week. It hit N1.1 trillion byFriday before CBN applied some liquidity mop-up apparently to forestall the pressure it could bring to the exchange rate under the new foreign exchange market regime.
Meanwhile, interest rates in the interbank money market rose sharply to 51 per cent yesterday as banks scramble for naira to fund the $4.2 billion sold by the Central Bank of Nigeria, CBN, on Monday. The naira depreciated marginally to N284.83 per dollar in the interbank foreign exchange market, despite $150 million supplied by the CBN through the 15 banks appointed as Primary Foreign Exchange Dealers, PFXDs.
On Monday, the CBN had sold $4.2 billion in spot and futures to clear backlog of matured foreign exchange obligations of banks. This move, according to a Bank Treasurer, who spoke on condition of anonymity, exceeded market expectations and triggered demand for funds in the interbank money market.
“Our challenge now is how to source for naira to fund the dollars sold by CBN, and we are talking about over N1 trillion, it is quite challenging”, he told Vanguard.
The intense competition for funds sent cost of funds to its highest level this year, with short term interbank interest rates rising by average of 165 percent yesterday. According to data provided by Financial Market Dealers Quote (FMDQ), interest rate for Overnight lending shot up to 51 percent from 18.7 percent on Monday, indicating increase of 168 percent. Similarly, interest rate for Securitised Lending (Open Buy Back) rose to 45 percent from 17.3 percent on Monday.