The naira weakened to a four-month low on Monday as foreign investors continued to pull out their money from government bills and bonds due to fears about inflation and currency weakness.

The local unit was traded at N161.25 to the dollar on Monday, as against N160.70 on Friday at the inter-bank market.

Dealers said weakening United States job data and the unresolved Eurozone debt crisis had prompted foreign investors to pull money out of riskier frontier markets including Nigeria to safe havens or to switch to cash.

Reuters quoted a dealer as saying, “Foreign investors are exiting the market and that is affecting the naira. This has been the trend since May. Foreign investors are exiting their bond positions in Nigeria owing to the rise in inflation, projected to reach 14.5 per cent by the third quarter, from 12.9 per cent in April, which means a worse outlook for the naira.”

Another dealer was quoted as saying, “The naira was also very illiquid at the moment. Real interest rates have slimmed down due to a rise in inflation and forex rates are going up.”

On Monday, the Central Bank of Nigeria auctioned $300m at N155.80 to the dollar, which was not enough to support the local currency. It sold $250m at N155.75 at its last auction on Wednesday but did not disclose the amount demanded.

The naira has been falling in recent weeks, despite Nigeria’s foreign exchange reserves rising to a 21-month high of $37.64bn by May 28, up three per cent from a month earlier, as dollar supply still fails to meet demand.

The currency, which had consistently stabilised around the N157 to the dollar level for more than three months of this year, came under pressure two weeks ago from strong dollar demand from fuel importers and investors repatriating dividends.

The CBN has directly sold dollars in the inter-bank market since last week, outside its bi-weekly foreign exchange auction, to calm the market, with mixed results.

On Monday, bond yields rose across all maturities, by up to 20 basis points, dealers said. The most liquid three-year paper was trading at 15.1 per cent, up from Friday’s close of 15.02 per cent.

The five-year paper was 15.43 per cent, from 15.35 per cent on Friday, while the 10-year bond traded 15.67 per cent, up from Friday’s 15.48 per cent.

The Head of Rates and Credit, Standard Chartered Bank, Mr. Ayodeji Adelagun, said, “The bond market has been extremely bearish due to illiquidity and developments offshore.”

Dealers said yields could continue to rise this week, although oil revenue distribution to the tiers of government was expected in two weeks and could provide liquidity for bonds.

Source: Punch