Global liquidity to drive naira value as CBN confronts new era

The level of global liquidity will increasingly determine the naira – dollar exchange rates as the Central Bank of Nigeria (CBN), confronts a new era of a domestic economy that is more closely integrated and co-related with the global economy.

Analysts say the naira value will be influenced mostly by events outside the control of the CBN. These are the level of global liquidity as U.S economic stimulus or quantitative easing (QE) begins to get rolled back, which in turn will affect the price of oil.

“The outlook for the naira is hinged on the relative availability of liquidity in the global economy,” said Ayo Teriba, CEO of Economic Associates, a risk analysis and research firm.

The naira traded at N163.93 against the

greenback on Friday, according to prices from the FMDQ website, on doubts over the CBN’s ability to support the currency against a backdrop of declining global oil prices and higher demand for dollars.

Nigerian assets are increasingly correlated with the global risk cycle, Standard Chartered analysts led by Samir Gadio, head of the bank’s Africa Strategy and FICC Research said in a September 08 note.

“Nigeria’s gradual integration with global capital markets and the increase in foreign participation since 2011 leave it more vulnerable to changes in external risk perception,” said Gadio.

“A less supportive external backdrop could potentially push up emerging- and frontier-market exchange rates and yield curves, as well as overstretched Eurobond spreads. This would weigh on Nigerian T-bill and bond yields and the naira, as experienced during previous EM sell-offs associated with shifts in external risk conditions and expectations.”

Nigerian stocks fell near a four-month closing low of 40,819.72 points on Friday, as a weaker naira hurt by falling global oil prices dampened appetite for equities, dealers said.

The index is down 1.33 percent year to date, as the heavyweight banking and cement stocks have failed to rally.

Shares in Dangote Cement, Nigeria’s most capitalised stock, have gained just 0.46 percent this year, to close at N220 on Friday, while First Bank, Nigeria’s largest lender by assets, has lost -14.72 percent to N13.90.

Bond yields rose last week as offshore funds sold naira assets, dealers said.

Foreign appetite for domestic T-bills and bonds increased with the inclusion of FGN bonds in the J.P. Morgan GBI-EM index in October 2012 and as loose global monetary policy and liquidity prompted investors to look for high-yielding risky assets.

Yields on Nigeria’s 2024 bond, the latest addition to a JP Morgan emerging market government bond index (GBI-EM), was bid at 12.42 percent, Friday’s FMDQ prices show.

This compares with the U.S Treasury 10-year yields which dropped four basis points, or 0.04 percentage points last week, to 2.54 percent as of 10:05 a.m., New York time on Friday, according to Bloomberg Bond Trader data.

The US Federal Reserve (Fed) is now likely to end its quantitative easing (QE) programme in October, having continuously reduced bond purchases this year, said Standard Chartered.

The prospects of tighter Fed monetary policy have helped the dollar appreciate this quarter, putting a dampener on commodity prices, including oil.

Nigeria’s benchmark crude bonny light fell to $95.2 a barrel on Wednesday, September 24, data from the CBN show, as slower demand and ample supplies outweighed expectations of a cut in oil output from the Organisation of the Petroleum Exporting Countries (OPEC).

The CBN which left its benchmark interest rates at 12 percent at its most recent meeting, has sold foreign-exchange reserves and hiked cash reserve requirements for banks, in a bid to shore up the naira and tame consumer prices which rose by 8.5 percent in August from 8.3 percent in July.

BusinessDay