Nigerian fixed income & FX market review

The recent circulars issued by the Central Bank of Nigeria (CBN) have stirred significant reactions in the Nigerian fixed income and foreign exchange (FX) markets. The directives primarily focus on the management of liquidity through the Open Market Operations (OMO) auctions, restricting non-bank entities from participating in these auctions. Forex Trader at United Bank for Africa, Nkechi Ezugha, sheds light on the impact of these directives and the potential implications for market players. The market initially experienced a wave of panic as the CBN's directive excluded individuals, corporates, and non-deposit financial institutions from the primary and secondary OMO auctions, leaving only banks and foreign investors eligible to participate. This move sparked concerns about heightened demand pressure among those previously active in the OMO auction space, leading to an uptick in buying activities. However, as the market approached the month-end, caution prevailed, with many investors engaging in profit-taking and portfolio reviews. Ezugha anticipates a shift in funds as investors redirected their focus to the Nigerian Treasury Bills (NTB) auction to fulfill their investment needs. With upcoming NTB and OMO auctions amounting to approximately $113 billion, the exclusion of certain market participants from the OMO auctions could trigger concerns and exert pressure on the Naira if alternative investment avenues fail to meet their expectations. Despite expectations of volatility following the CBN directives, Ezugha points out that oversubscription in OMO auctions is a common occurrence due to the attractiveness of the interest rates offered. The recent auction where the subscription level exceeded the auctioned amount aligns with this trend, showcasing continued interest from various market players, including deposit money banks, non-financial institutions, and foreign investors. Shifting the focus to the forex markets, concerns arise regarding the stability of the Naira amidst the CBN's efforts to attract more foreign investors to the OMO market. While initial optimism surrounding a stable Naira for the remainder of the year prevailed, recent developments have instilled doubts among market participants. The declining foreign reserves, currently standing at $40.79 billion compared to $45 billion earlier in the year, raise apprehensions about potential outflows and their impact on the Naira. Ezugha emphasizes the need for the CBN to ensure attractive rates to retain foreign investor interest and prevent further pressure on external reserves. With looming maturities between October and December, maintaining competitive rates becomes crucial to secure continued inflows and bolster the stability of the Naira. As market dynamics evolve in response to the recent CBN directives and external economic factors, vigilance and strategic decision-making will be essential for navigating the uncertainties and opportunities that lie ahead in Nigeria's fixed income and FX markets.