Banks Provision for Retail FX Auction Could Pressure Funding Rates

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Banks Provision for Retail FX Auction Could Pressure Funding Rates
Central Bank of Nigeria

Banks Provision for Retail FX Auction Could Pressure Funding Rates

Analysts have said that funding rates will likely increase Friday as deposits money banks (DMBs) make provision for the retail foreign exchange (FX) auction.

The Central Bank is schedule to conduct foreign exchange auction Friday amidst dwindling inflow into the nation’s external reserves.

Month to date, foreign exchange reserves has dropped marginally at 0.6% as the apex bank move against abuse of FX by exporters for non-repatriation.

Chapel Hill Denham said in a note that as Interbank funding rates remained subdued yesterday, as funding pressures were minimal due to robust system liquidity.

On Thursday, the financial system liquidity opened at ₦378 billion from ₦509 billion Wednesday as additional inflow hits the system.

Analysts said liquidity was further bolstered by open market operations (OMO) maturities, estimated at ₦262.42 billion.

Meanwhile, the Open Buy Back (OBB) and Overnight (OVN) rates moderated by 25 basis points (bps) and 38bps to 1.50% and 2.00%, respectively on Thursday.

“Funding rates will likely increase tomorrow, as DMBs provision for the retail FX auction”, analysts at Chapel Hill Denham said.

In a related development, sentiments were mixed in the fixed income market Thursday, as short term rates compressed due to robust system liquidity.

Meanwhile bond yields rose on the back of uncertainty.

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At the front end of the curve, analysts said the Nigerian Treasury Bills (NTB) and OMO benchmark curve compressed by 3bps and 12bps to 1.62% and 3.17% respectively.

Banks Provision for Retail FX Auction Could Pressure Funding Rates
Central Bank of Nigeria

Chapel Hill stated that in the bond market, yields remained under pressure, as the benchmark curve expanded by an average of 3bps to 7.86%.

This movement was driven by repricing at the mid (+8bps to 7.29%) and long (+5bps to 9.36%) of the curve.

“The high level of liquidity in the financial system should continue to provide support for yields, although duration aversion may persist as the bond rally losses steam”, Chapel Hill stated.

In the foreign exchange market, the naira weakened against the dollar by 6bps or 25 kobo in the I&E Window to ₦385.75, but traded flat in the parallel market at ₦477.00.

Similarly, the official and secondary market intervention sales pegs were unchanged at ₦381.00 and ₦380.69 respectively.

Banks Provision for Retail FX Auction Could Pressure Funding Rates

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