Naira appreciates to N315.93/dollar as foreign investors take advantage

with agency reports
Naira, yesterday, appreciated by 3.52 per
cent to close at N315.93 to a dollar at the
interbank market, prompting calls for
foreign investors to take advantage of the
However, the naira suffered a loss in
value as it depreciated at the parallel
market to trade at N402 per dollar, weaker
than N397 it traded at its previous
session as dollar shortages gripped the
official market. The naira, which hit fresh
record low since the central bank floated
the currency on the official inter-bank
market in June, first touched N400 on the
black market this month.
On the inter-bank market yesterday, no
trade was posted until three minutes
before the end of the session, when the
central bank which has been reducing its
dollar sales, intervened, traders said. Only
three deals worth $0.75 million were
traded at 305.50 per dollar, a level the
market has closed at since Monday.
Specifically, according to Bloomberg, in
the last two weeks, Exotix Partners LLP
and Standard Bank Group Ltd. have told
clients; most of who fled after the
country started imposing capital controls
from late 2014, that they should start
buying naira assets again. The naira
which has been the worst-performing
currency this year among more than 150
globally has depreciated 37 percent
against the dollar since the Central Bank
of Nigeria, CBN abandoned its peg on
June 20, while bond yields have jumped
to more than 20 percent. The naira
strengthened 4.6 percent to 315 per dollar
on Tuesday after falling to a record
350.25 on August 19, 2016.
“The cheap naira is attracting foreign
investors,” said Lutz Roehmeyer, a money
manager at Landesbank Berlin Investment,
which oversees about $12 billion of
assets. “At 325 per dollar, the naira is too
weak” and Landesbank anticipates a
rebound, he said.
Roehmeyer’s funds have doubled their
holdings of naira debt, albeit in the form
of bonds issued by the World Bank’s
International Finance Corp. rather than
the Nigerian government, to the
equivalent of around $9.2 million this
month, he said.
The CBN fixed the currency in February
2015 at 197-199 per dollar to stop it
plunging amid the decline in the price of
oil, on which Nigeria depends for 90
percent of exports and the bulk of
government revenue. He relented after 16
months as the country stumbled toward a
recession and foreign reserves fell to their
lowest level in 11 years.
The naira has now weakened more than
any other major oil currency since
mid-2014, when crude prices started
retreating. It’s lost almost half its value
against the dollar in that period,
compared with 46 percent for
Kazakhstan’s tenge and 35 percent for the
Colombian peso.
That makes it a good time to buy
Nigerian one-year Treasury bills with
yields of about 22 percent, Stuart
Culverhouse, chief economist at Exotix in
London, wrote in an Aug. 9 note. The
potential return is more than 33 percent if
the naira strengthens to its fair value of
290 against the greenback, he said.
In April, one-year T-bills yielded just 10
Oil Production
The trade is not for everyone, given
Nigeria’s outlook. The economy will shrink
1.8 percent this year, its first contraction
since at least 1991, the International
Monetary Fund forecasts. Oil production
has sunk to a near three-decade low of
about 1.5 million barrels a day as
militants attack pipelines and export
terminals in the south of the country.
While Landesbank Berlin and Exotix say
the currency has fallen enough, others
aren’t convinced. The naira will weaken to
396 by year-end and 515 by the second
quarter of 2017, according to Access Bank
Plc, Nigeria’s fourth-biggest lender.
Forward prices also predict worse to
come. Three-month non-deliverable
forwards trade at 357 to the dollar, and
one-year contracts at 394. The median
forecast of economists in a Bloomberg
survey is for the currency to stabilize at
344 this year.
Sidelines Preferred
“The combination of a cheaper naira and
higher yields on naira paper are tempting,
but we remain comfortable on the
sidelines,” Brett Rowley, a managing
director at Los Angeles-based TCW Group
Inc., which oversees $195 billion of
assets, said in an e-mailed response to
questions on Aug. 16. “Restoring oil
output would help assuage our concerns.”
Investors are also yet to be convinced
that the naira truly floats. The central
bank sold dollars at 309 last week and
may be trying to keep the rate stronger
than 320, according to Craig Thompson of
Continental Capital Markets SA, based in
Nyon, Switzerland. The naira trades at 395
on the black market, 20 percent weaker
than the official rate.
“The exchange rate is closer to fair value
in the eyes of most investors,” said
Andrew Howell, a New York-based
frontier-markets analyst at Citigroup Inc.,
the world’s biggest foreign-exchange
trader. “But there still aren’t many
inflows. You can’t really call it a normally-
functioning exchange rate yet.”
Mitigating Risk
Bottom of Form
Still, bond investors are closer to pulling
the trigger than they have been in more
than a year. They’d be even more
confident if they were able to mitigate the
risk of further depreciation by buying the
naira-settled futures that Nigeria
introduced in June, according to Stephen
Bailey-Smith, senior economist at
Copenhagen-based Denmark’s Global
Evolution Fonds A/S, which manages
$3.2 billion of assets.
Nigerian local-currency bonds have lost
17 percent in dollar terms this quarter,
through yesterday, compared with the 3
percent average return for 31 developing
nations monitored by Bloomberg indexes.
The yield on benchmark government naira
notes due January 2026 has climbed 226
basis points since June to 15.08 percent.
“We haven’t come back in to the local
market yet, but we’re looking at it closely,”
Bailey-Smith said. “If you can get a yield
above 20 percent and hedge the FX risk,
it’s not a bad trade at all. The futures
market is intended to help you do that,
but it’s difficult to buy them.”


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