The Nigerian local currency, naira, plunged significantly at the apex bank’s Investors and Exporters Window on Wednesday amidst surging demand for the greenback.
Naira depreciated by a significant N7.75 or 2.0% against the United States dollar to close at N393.25 in the Window.
However, analysts at Chapel Hill Denham said as expressed, Naira is fundamentally overvalued based on the Real Effective Exchange Rate (REER), by up to 25% measured against its long run equilibrium.
“The market may require a much lower or higher adjustment, depending on the level of confidence in the structure of the FX market, the extent of balance of payments adjustments required, and the outlook for oil prices”, Chapel Hill Denham said.
Analysts however explained that it is uncertain if the regulator is willing to allow the currency weaken further towards fair value, or this is a one-off move.
Regardless, Chapel Hill Denham said its base case view is that the market is likely to see further adjustments in 2021, which would take exchange rate above 420.00 in the I&E Window.
In the parallel market, the Naira lost 0.82% (or N4.00) to N487.00.
However, the CBN retained the official rate at 379.00. The external reserves fell to US$35.46bn (-0.64%) on 23 November 2020.
Meanwhile, financial system liquidity remained buoyant in today’s session, opening higher at N387.69 billion from N370.30 billion in the prior session, after an open market operations (OMO) maturity inflow of N103.10 billion yesterday.
Consequently, money market rates – OBB & OVN – further reduced by 38 basis points (bps) and 56bps respectively to 0.50% and 0.56%.
“We expect buoyant system liquidity to keep the funding rates subdued at low single-digit till close of the trading week”, analysts stated.
Also, the fixed income market traded mixed today.
After close of trading, discount rates on benchmark Nigerian Treasury Bills (NTBs) and OMO bills were unchanged at an average of 0.10% and 0.15% respectively.
Bond yields on the other hand, remained bullish as average yield on the benchmark curve fell further by 7bps to 4.10% on buy sentiment across the short (-30bps to 1.58%) and mid (-1bps to 4.20%) segments of bond yield curve.
Analysts expressed view that the relatively stronger buying sentiment is linked to the Central Bank of Nigeria’s sustained dovish stance at the MPC meeting.
As well, the expectation of further decline in stop rates at the NTB auction which held Wednesday.
The CBN floated a NTB auction today on behalf of the DMO, offering and allotting N150.60 billion.
Subscription total reached N445.94 billion on the offer remained high, with a bid-cover of 2.96x as against 3.59x at the last auction.
Stop rates were lower across the offered tenors: 91-day (-1bps to 0.022%), 182-day (-6bps to 0.09%) and 364-day (-15bps to 0.15%).