Markets seek clarity on CBN naira strategy

The Central Bank of Nigeria’s (CBN) seemingly lack of a clear monetary policy stance in the face of falling oil prices has left the markets showing mixed results at the end of trading last week.

The NSE ASI rallied for three days in a row after two long weeks of sell-offs.

The NSE ASI closed trading on Friday up 2.51 percent or 865.6 points to 35,381.02.

According to analysts, bullish sentiments were revived after foreign investors’ exit left stocks trading at bargain prices.

“The recent decline in the market presents viable opportunities,” said Afrinvest in a Friday note.

The sell-off was initiated after foreign investors feared that capital gains of naira-denominated assets would be eroded by a weakened currency.

“The broader selloff was driven primarily by the profile of the investors, depth of the market, and a knee jerk reaction to the macroeconomic outlook,” Afrinvest said.
“The sell-offs are not necessarily a representation of the underlying value of the growing market”, the note said further.

The mixed trading shows that longer-term investors still see a lot of value in the markets, and that the markets will rebound.

“Nigeria [has] the fiscal space to run deficits in the region of 4-5 percent of GDP for a few years without undermining fiscal stability,” said Carmen Altenkirch, director of the sovereign group at the Fitch ratings in an interview with Bloomberg.

According to FBN Capital head of equity research, Olubunmi Asaolu, investors are waiting on the sidelines for the “dust to settle down” before redeploying their capital.
“It is not so much about the elections or if there will be a devaluation, they just need to be sure of when it will happen”, he alluded.

“The potential for an extended bear market is unlikely, considering the existing monetary capacity to support the naira and the anticipated collective response of OPEC to the recent supply glut”, said Afrinvest said.

The bond market, however, saw yields rise as investors took advantage of a slight strengthening of the naira to exit the market.

The naira closed at N172.31 per USD on Friday, weakening slightly by 0.35 percent the day before, according to FMDQ data.

The CBN mandated to keep the naira within a band of N155 +/- 3 percent, indicating an upper bound of N169.6. With the naira now trading at N172.8 to the dollar, investors are at a loss as to when the CBN will make its next move.

“There’s no need for anybody to panic, the CBN has always intervened,” said CBN governor, Godwin Emefiele.

The oversupply of naira in the market has been caused by the sell pressures on the local currency on the back of falling oil prices, and the CBN’s regulation, placing the cap on interest-yielding SDF deposits at N7.5 billion per bank.

The new SDF policy saw about N410 billion in potentially idle bank funds move into liquid and semi-liquid assets, especially T-bills, which yield 11.5 percent.

NIBOR rates rose by 0.06 percent, indicating a slight tightening of bank liquidity. According to analysts, banks are bloating their T-bill positions, indicating that the CBN SDF policy may not be having the desired effect.

On the mixed results in trading, analysts say investors, especially institutional investors, are moving funds away from one asset class to another to take advantage of value picks.

With the record low prices trading in the stock exchange, investors are seen moving funds out of fixed income and currency into equities in order to take advantage of the bargain prices.

Source : BusinessDay

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