Naira depreciates across FX market after rate cut
Naira depreciated in value against the dollar by N0.94k or 0.48 percent at the inter-bank market. After trading on the same day, the local currency closed at N198.36k/$ as against N197.42k/$ at the inter-bank market, data from FMDQ revealed.
At the Bureau De Change (BDC) segment of the foreign exchange (FX), and the parallel market, the naira fell in value by N2 or 0.83 percent each. While it closed at N242/$ at parallel market, it closed at N240/$ at the BDC segment. The CBN’s clearing rate remained stable at N 197/$.
Non-deliverable currency forwards, a derivative product used to hedge against future exchange rate moves, indicated markets expected the naira’s exchange rate at N235.56/$ in 12 months’ time – the strongest level in five months – and compared with N245.25 at Tuesday’s close, Reuters report.
Nigeria’s central bank cut benchmark interest rate to 11 percent from 13 percent on Tuesday, its first reduction in the cost of borrowing in more than six years. The continent’s top oil producer has been hard hit by a plunge in crude prices over the last year.
Consequently, yield on the most liquid 5-year bond fell 264 basis points to a five-year low of 7 percent while the benchmark 20-year bond closed 150 basis points down at 10.8 percent on Wednesday, traders said.
Bond yields had traded above 11 percent across maturities prior to Tuesday’s rate decision, with the 2034 bond trading at 12.30 percent.
The central bank has been injecting cash into the banking system since October in a bid to help the economy. Banking system credit stood at 290 billion naira ($1.5bn) as of Wednesday, keeping overnight rates as low as 0.5 percent.
Adesoji Solanke, sub-Saharan Africa banking analyst, head of research, Nigeria, noted that market rates had already declined significantly to single digit levels across different treasury assets and maturities, as the CBN had not been mopping up liquidity using OMO bills.
“Since the market was already flush with liquidity and rates already comfortably in single digits, did the MPC still need to cut rates? The policy decisions look somewhat confusing because the MPC mentioned that its data suggests that the banks are not lending to corporates but to government,” he said in a report.
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