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 appreciation. 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 percent. 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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