Increasing yields on treasuries in the United States are casting a dark shadow on Nigeria’s financial market as foreign portfolio investors have begun a quick exit.
After an extended period of FX volatility between 2015 and April-2017, which saw the naira depreciate to a record high of N500/$ at the parallel market, the introduction of the Investors’ & Exporters’ (I&E) window by the Central Bank of Nigeria (CBN) has broadly stabilized the currency market over the last 13 months.
However, there has been observed sustained pressure on the naira against the dollar over the last three weeks; the parallel market rate has depreciated from N361/$ in April to N365/$ in May, I&E/NAFEX rate is down 0.4 percent month-to-date to N362/$ while the official rate shed 10 bps month-to-date to N306.0/$.
According to investment researchers at United Capital, this creates a nostalgic sensation of a recent past.
The researchers, in an investors’ note obtained by business a.m. on Thursday, traced the recent pressure on FX rates to a number of things, Firstly, funds repatriation by foreign portfolio investors amid rising US treasury yields, as indicated by the sharp declines in the equities market (down 6.4 percent month-to-date), is a factor.
“Additionally, elevated demand for dollars driven by summer holiday travellers and demands attributable to political spending, ahead of the 2019 election, accounts for other factors.” The researchers said.
“Although fears of a potential reduction in oil prices is a concern, the CBN is in a better position to curtail the risk of escalating FX rates, given its current reserves of $47.7 billion. Nevertheless, marginal depreciation around the current band is probable.”