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Currencies

Naira remains stable at the black market, Brent crude moves past $40 per barrel

The naira was strengthened as the commodity-based currency’s major earnings, crude oil, remained above the $40 dollar mark

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Naira remains stable at the black market, Brent crude moves past $40 per barrel, Where to invest N500,000 right now, Naira crashes to new record low at black market as businesses divert export proceeds,Naira crashes to N500/$1 at black market as CBN adjusts exchange rates

The Naira has been stable for three working days running at the parallel segment of the foreign exchange market against the United States dollar. It sold at N450 to $1 on Friday and has remained at that rate so far.

The stability of the naira was strengthened as the commodity-based currency’s (naira) major earnings, crude oil, remained above the $40 dollar mark, thereby increasing foreign exchange inflows to the country’s foreign exchange reserves.

READ ALSO: Precious metals slump, investors focus on Central Bank’s intervention

“Commodities and emerging market currencies are clearly finding it easier to rise against the dollar on hopes of economic recovery, but it is a different story when it comes to the yen,” said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo.

Correlation between crude oil and the naira: The crude oil sector provides around 90% of Nigeria’s foreign exchange earnings and around 70% of its budgetary revenues, thereby helping to boost Nigeria’s monetary assets and providing the needed ammunition to stabilize the naira. 

READ MORE: Nigeria’s foreign reserves hit $36.57 billion; Emefiele keeps his word on defending the naira

The macro fundamentals surrounding Nigeria’s major export, including the recent surge in crude oil prices to about $41, seem to have helped stabilize the naira in recent days.

Brent crude drops to $25, oil demand drops by about 10% of world’s consumption, Brent Crude Oil hits $26, as Nigeria's Sweet Crude demand falls, Oil price pushes up before OPEC meeting, Asian equity markets mixed, NIGERIA OIL: Darker days ahead as Brent falls below production cost, Brent crude drops, as oil traders focus on OPEC+ meeting, Naira remains stable at the black market, Brent crude moves past $40 per barrel

READ ALSO: Despite COVID-19, Lagos State Government says Q1 budget performance rose to N163.2 billion

In addition, Nigeria’s central bank had stated that it would use all the monetary tools it had to rescue the Nigerian economy from the fallouts of the COVID-19 induced global economic strain and stabilize the naira with some concrete steps it had taken to tackle currency speculators.

Some weeks ago, Nigeria’s central bank resumed the weekly dollar sales of $100 million for small businesses and individuals who are in genuine need of Foreign exchange.

 

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Olumide Adesina is a France-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment trading. Follow Olumide on Twitter @tokunboadesina. He is a Member of the Chartered Financial Analyst Society.

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Currencies

Why external reserves is falling despite a rise in oil prices

Increased oil prices seem not to have stopped the further slide in Nigeria’s foreign reserves.

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Emefiele’s reappointment

Nigeria’s external reserve declined from $36.3 billion as of January 29, 2021, to $34.998 billion as of March 1, 2021, losing about $1.4 billion in just a month.

The rapid drop in the country’s external reserve is occurring despite the increase of Brent crude to over $66 per barrel as of February 24, 2021, from about $51 per barrel that it closed with on January 4, 2021.

Some analysts had attributed a couple of likely reasons for this drop. This includes the CBN intervention in the forex market to stabilize the exchange rate, low foreign inflows into the country, some CBN forex policies which discourage foreign investors.

The President of the Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadebe, during his chat with Nairametrics, said that the decline in Nigeria’s external reserve despite the recent increase in oil prices was due to supply shocks and shortages of foreign exchange due to drop of forex inflow from various sources.

Gwadebe said, ‘’You know we have a lot of supply shocks and shortages even before the appreciation of the crude oil prices, we just came out of recession with less than even 0.1%. We know the prices of crude oil, the demand came down throughout the Covid-19 period, even now with the new variant. So the IMTOs inflow has reduced drastically, export proceeds have reduced drastically, the I & E window has also gone down drastically. You know you can appreciate what is happening at the I & E window, their trade transactions sometimes hover up to N420/$1.’’

On why increased oil prices have not stopped the further slide in the reserves, the ABCON President said, ‘’Completely all the sources coming have dried up, the oil prices dried up, IMTO window dried up. We are talking about a month, and these are contracts that have been closed for 3, 6 months delivery, we are just witnessing it. It will take time, it’s a very good buffer, no doubt we rely on it heavily for 90% of our foreign exchange supply. So if we have that improvement, it will give the CBN the muscle, the wherewithal to continue to support the local market. It will give CBN the muscle to make any speculation, check any hoarding.”

‘’Now that we have prospects in oil prices definitely that news, that coming in of new inflows will give the CBN the muscle to make any speculation, to checkmate hoarding, because they are in I & E window, they are in BDC window, they are in a lot of windows, so they can come up with liquidity. Definitely, it is going to. And we have seen the impact because the way it was going before this increase in crude oil prices, it was worrisome and if you look at it now it has remained stable, the highest it went is N480 for the parallel market and its always trending down. There is that stability just for that news, so you can imagine when we start receiving the liquid grill just imagine what it will become just like people have predicted and analyzed N430, N450/$1 is what we might be looking at by the end of the year,’’ he added.

On his part, a treasury and financial analyst, Odinaka Nwokonkwo, while giving reasons why it should be that way, pointed to CBN obligations. He said the apex bank paid Eurobond maturities in January or thereabout, and did FX swap with local and international counterparts which may have matured and needed to be paid down.

He said, ‘’There is a Eurobond maturity that CBN funded for, so that would also reduce the reserves, then another thing is when you look at, CBN has been intervening in the forex market. So on that space, you are seeing retail, you are seeing SME and invisibles intervention weekly. Retail is biweekly and SME and invisible about $100 million weekly. So sometimes CBN has bilateral transactions with international institutions and local banks where they take their FX and basically give them treasury bills, so that also is part of the reserves.

‘’So if some of those swaps have matured and CBN needs to pay down these bonds, they will also see a reduction. So it’s a combination of a lot of things. And also what is the volume of sales of the oil, are we really selling more, is the quantity we are selling is the same as what we are selling before. The demand might drop a little bit because some countries also have a second lockdown.’’

Nwokonkwo also believes that in the next quarter, there might see an accretion because some of those obligations may not be there.

While pointing out that the accretion rate is slower than the debit rate, he said the oil price at $65 is not a significant increase compared to CBN FX obligations.

These external reserve figures and swings point to two things: Nigeria seems to be overestimating the power of it oil to keep the country running and the enduring reality it needs to find other ways of earning foreign exchange.

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Bloomberg report on OMO is “fabricated” – CBN Official 

Officials at the APEX Bank are denying reports that they plan to unwind OMO Sales.

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Sources in the central bank have denied a recent Bloomberg report that the CBN will be unwinding its Open Market Operations programme which has targeted foreign investor inflows for the last three years. 

According to a Bloomberg article, the central bank was “preparing an end to an era of debt sales in reference to OMO bills which are highly lucrative risk-free securities loved by foreign investors due to their relatively high yields.   

The report cited comments from CBN director of monetary policy, Hassan Mahmud who they claimed said: “offerings to non-residents of so-called Open Market Operations bills — introduced to help stabilize the naira following the oil-price collapse in 2015 — are to be phased out once current obligations have been redeemed.” 

However, a senior source within the central bank denied this claim reiterating that there are no plans to unwind the sale of OMO bills to foreign investors. The source who preferred anonymity as the bank was yet to comment officially claimed it was “fabricated” and not true.  

Why this matters

The central bank has relied on Open Market Operations as a means of attracting Foreign Investor dollars into the country. The dollars are also used as a liquidity buffer for the country’s falling external reserve and a major factor in stabilizing the exchange rate between 2016 and 2019.

  • To achieve this purpose, OMO bills were priced at attractive yields (as high as 18% per annum at some point) and were a major source of earnings for yield-hungry foreign investors. The CBN also provided them with near guarantees on their foreign exchange hedging it via FX Swaps.
  • However, in 2019, the CBN yanked off local and institutional investors from accessing OMO market leaving foreign investors and banks as the only buyers of the bills.
  • A recent Chapel Hill report read by Nairametrics suggests OMO bills held by foreign investors topped $11 billion as of June 2020.
  • The report also claims CBN OMO sales dropped by 70% to a 5-year low of N6.5 trillion in 2020.

 

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