By , 06.20.2010ÂÂÂ
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Specific money market rates dropped significantly last week, owing to fiscal injections that buoyed liquidity in the system.Cost of borrowing among banks at the inter-bank lending window declined remarkably. There were speculations that yield on bond securities would be affected as the Debt Management Office (DMO) rolls out its sixth debt auction for 2010, this week.
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Before the allocations by the Federation Accounts and Allocation Committee (FAAC) last week, which amounted to N403 billion, the 20-year bond, Nigeria’s longest-dated debt instrument was trading at a yield of 8.7 per cent. However, after the fiscal disbursements last week, it traded at 8.3 per cent.FAAC had last Tuesday distributed N403 billion from federal accounts to the three tiers of government for their May allocations.ÂÂÂ
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Inter-bank lending rates began a journey southward as the allocations hit the system. Call rate closed last Thursday at 3.83 per cent from 6.17 per cent the previous Friday. The 7-Day (Nigeria Interbank Offered Rate) NIBOR, which had moved up to 6.96 per cent, closed lower at 4.45 per cent last Thursday. It was noticed that the NIBOR, almost on all tenors – the short and long instruments responded to the fiscal injection by way of reduction in rates.ÂÂÂ
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“By the close of trading last Thursday, secondary market yields on sovereign bonds had declined across maturities, hammered by excess liquidity from government’s fiscal distribution. Monies have come in and dealers have cash to buy bonds from the secondary and primary market. This will make the demand at the auction next week (this week) high, so the stop rate (the yield at the auction close) will go down,” a market analyst said last week. On the foreign exchange market, the naira strengthened at the official market, depreciated at the inter-bank window but remained stable at the parallel market. Further details about the market are provided in the relevant sub-sections underneath.
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Lending, Interest, Inter-bank           ÂÂÂ
As highlighted earlier, specific money market rates dropped significantly last week, owing to fiscal injections that buoyed the liquidity of the system.Following the April FAAC allocations to the tiers of government amounting to N750 billion, (with N410 billion being April allocations and another N340 billion being in arrears for the year), market liquidity, which had tightened considerably began to ease – triggering a fall in inter-bank lending rates as well as bond yields.
Inter-bank lending rates, which had returned to their very low levels about three weeks ago started moving up, up to Friday, June 11. Call rate had increased from 1.72 per cent to 6.17 per cent and the 7-Day NIBOR from 3.20 per cent to 6.96 per cent.Last week, following the fiscal injection, Call rate dropped to 3.83 per cent and the 7-Day paper to 4.45 per cent.
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Traders had attributed the increase in the rates to outflow to foreign exchange transactions and government treasury securities. The CBN as at the week ended June 11 sold about N100 billion in 264-day, 182-day and 91-day treasury bills and bonds, which represented funds moving out of the banking system. Besides, the Foreign exchange market was said to have pulled out about $600 million from the system, as part of forex purchases by dealer banks. The May fiscal inflow was a cushioning and lowering factor on the rates as witnessed last week. Government revenue has always been a great influence on money market rates in Nigeria, because of its direct impact on market demand and supply, anytime there is an injection.ÂÂÂ
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However, the low position of the inter-bank rates is yet to translate to reduced lending rate to the private sector. Interest rates on savings and overnight accounts, which hit the zero point in some banks only recently has merely rose to between 2 and 4 per cent in some banks. But lending rate as published by banks is still between 17 and 18 per cent.The DMO announced last week, it would sell N80 billion in 3-year, 5-year and 20-year sovereign bonds this week, specifically June 23, its sixth debt auction this year. The DMO said it would sell N30 billion in 3-year bonds, 30 billion in the 5-year paper and 20 billion in the 20-year debt instrument, adding that yields will be determined after the auction.
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But analysts said yield on the bond instruments might decline owing to the expansion in market liquidity, triggered by the FAAC injections. “The excess liquidity from the government’s revenue presents a situation of probable surplus demand against supply, which ordinarily will push down yield, a trader said. “Monies have come in and dealers have cash to buy bonds from the secondary and primary market,” said an analyst adding: “This will make the demand at the auction high, so the stop rate (the yield at the auction close) will go down.”  ÂÂÂ
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Before the FAAC allocations last week, the 20-year bond, traded at a yield of 8.7 per cent, but last week it traded 8.3 per cent.Traders said investors bought at the secondary market last week, anticipating that government will issue at a lower yield this week ahead of surplus demand. Some market watchers are expecting yields at the government’s auction to drop by 200 basis points.
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Forex Transactions
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The Nigerian naira strengthened at last week’s wholesale dutch auction system (WDAS) as against the marginal slide it suffered the previous week. At the first bi-weekly auction for the week, last Monday, the naira gained 1 kobo to N148.88/$1, compared to N148.89/$1 at the previous auction.
Last Wednesday witnessed another appreciation, as naira gained a significant 17 kobo to trade N148.71/$1 as against N148.88/$1 previously.However, naira weakened slightly on the inter-bank towards the weekend to N151.43/$1 from N151.35/$1 at the beginning of the week, a development traders said arose from demand surge that surpassed the available market supply.ÂÂÂ
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“A larger number of transactions, which were not eligible for the CBN’s bi-weekly forex auctions had been diverted to the inter-bank market, boosting dollar demand and likened to the situation in parts of May,†an analyst said.The month of May witnessed a surge in demand for foreign exchange when compared with market activities in the previous month, which observers said was caused by the recovery in the economy. Last month, the CBN offered $2.30billion and sold $2.33billion against $1.75billion and $1.70billion offered and sold respectively in April. The increase was 31.43 per cent on the offer, 22.93 per cent on the market demand and 36.37 per cent on the volume sold. The volume sold in the month was higher than $1.754billion sold in March; $1.95billion sold in February and $1.683billion in January; and $388.47million lesser than the corresponding figure in May 2009.The CBN at the first bi-weekly auction last week, met the market demand of $384 million, having initially offered $400 million at a broadly flat rate of N148.88 to the dollar.
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Traders said last Monday’s outing at the WDAS showed that the CBN is capable of meeting demand at its auction. It was gathered that Agip oil sold $6 million to some banks last Monday, which augmented the supply by the CBN, even though some traders insisted the money was not enough to move the market. Traders also said two oil firms, Chevron and Schlumberger, sold about $51 million to some banks last Wednesday, boosting dollar liquidity further. Rates at the parallel market oscillated between N152 and N153 to a dollar last week, with traders insisting that the stability of the forex market will continue to rest on the capacity of the market regulator to fund the market adequately. There were other developments last week that could affect the market trend from the near to medium term.
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May Inflation RateÂÂÂ
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Nigeria’s year on year (yoy) inflation fell to 11 per cent in May from 12.5 per cent the previous month. The yoy inflation climbed to 12.5 per cent in April from 11.8 per cent in the previous month as cost of food increased. NBS stated that the fall in the rate for May was led by slower growth in food prices.
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The data indicated that food price inflation, which forms the bulk of the index basket in Nigeria, fell to 12.3 per cent year-on-year from 14.3 per cent in April.The yoy inflation rose from 12 per cent in the last quarter of 2009 to stabilise at 12.3 per cent in January and February 2010 and declined to 11.8 per cent in March 2010.The CBN Governor, Sanusi Lamido Sanusi, said recently that the threat of inflationary pressure in the near-to-medium term in Nigeria remains real given the expansionary stance of the 2010 Federal Government budget and the anticipated increase in spending usually associated with the run-up to election across the country.
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The CBN had at the end of its monetary policy committee (MPC) meeting last month noted that it favoured high market liquidity and low interest rates at the moment, even if that meant inflationary pressure. Sanusi has always said that the monetary authority would continue to monitor price developments in the months ahead with a view to ensuring that the downside risk of inflation to growth is minimised.
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External Reserves
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Nigeria’s external reserves dropped to $38 billion last Friday, according to data posted on the CBN website. The reserves ended 2009 at $42.40 billion. It was also gathered last week that the CBN is considering holding a part of the nation’s external reserves in the Chinese Yuan. That is part of the considerations by the banking watchdog for preserving the value of the external reserves and eliminating losses, at a time of increased volatility in the major world currencies.
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Reuters quoted the CBN Governor, Sanusi Lamido Sanusi, as saying during an interview in Paris that the “CBN was also considering diversifying its forex reserves with a small shift into Asian currencies, in particular the Chinese Yuan.â€ÂÂThe monetary authority holds 15 per cent of Nigeria’s foreign currency reserves in Euros and almost 80 per cent in dollars. But the euro has slumped against the dollar since last month as concerns mount that Greece’s debt crisis might spread to other nations in the euro-zone.
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The Director of Reserves Management Department of the CBN, Lamido Yuguda, had said in Abidjan recently, ahead of the African Development Bank’s annual general meeting that the CBN might reduce the amount of Euros it holds in its reserves if the European currency’s decline continues. Yuan is considered as a form of diversification in the holdings of the reserves.
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(Source:ThisDay)
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