The week that was (March 18-22): CBN leads interest rates higher
CBN steps back in to nudge markets higher: Largely reflecting the liquidity hangover across the financial system, interest rates opened the week lower with knock-on at the primary market auction on Wednesday where the 1-yr NTB closed at a discount rate of 12.34% (effective: 14.1%). This triggered a response from the CBN via the surprise re-introduction of the 1-yr OMO bill at an effective yield of 15%. This action worked to drive an upward repricing of front-end yields which closed the week up 10bps (1-yr: +32bps w/w). For FGN bond yields, markets continue to remain in a ‘limbo’ with wide bid-offer spreads across most tenors. Yields inched up 3bps on average, but actual trading remains soft.
Figure 1: Naira Yield Curve
Source: FMDQ, NBS
FX reserves resume uphill trend: Supported by higher oil prices and likely CBN buying in the FX market, Nigeria’s FX reserves have resumed an uphill climb after slowing down over recent months with a 1.1% rise to USD43.5billion at the end of last week. The improvement continues to underpin a ‘stability thesis’ around the exchange rate which closed the week largely flat from the prior week at NGN360/$ at the IE window. Turnover at the IE window climbed 3% w/w to USD1.4billion with the exchange rate showing signs of strength in the segment.
The week ahead (March 25-29) – CBN to retain status quo at the MPC and lower yields at the bond auction
In the trading week ahead, system maturities decline to NGN54billion made up of OMO bills. In addition, this week seeks the redemption of a NGN38billion commercial paper by Dangote Cement. There will be a bond auction on Wednesday where the DMO would look to sell NGN100billion split between 5-yr (NGN40billion) 7-yr (NGN40billion) and 10-yr (NGN20billion) bonds. The auction is likely to be keenly watched by bond traders where a lack of catalysts and triggers have left markets stuck in a bit of zombie world.
CBN likely to stand pat at the final MPC? This week sees the second monetary policy committee meeting of 2019 and likely the last one for the CBN governor. Though the soft growth patch and slowing inflationary picture hint at a dovish MPC meeting, the re-introduction of the 1-yr OMO bill last week alongside hawkish commentary by the CBN governor hints at a retention of the prevailing tight stance.
- OMO: Open Market Operations
- CP: Commercial Paper
- DG: Deputy Governor
- NTB: Nigerian Treasury Bill
- FGN: Federal Government of Nigeria
- CBN: Central Bank of Nigeria
- DMO: Debt Management Office
- PBoC- Peoples Bank of China
- PMA: Primary Market Auction
- FAAC: Federal Accounts Allocation Committee
- I&E: Investors and Exporters Window
- MPC: Monetary Policy Committee
- NBS: National Bureau of Statistics
- REER: Real Effective Exchange Rate