One month into the June 27, 2016 introduction of and formal unveiling of the Naira-Settled OTC FX Futures Market, the pioneer 1M contract – NGUS JUL 27 2016 $/N279, for about $26.73 million executed between the Central Bank of Nigeria (CBN) and authorised Dealers on FMDQ OTC Securities Exchange, matured and was settled on Wednesday, July 27, 2016, according to this BusinessDay.
Consequently, in line with the FMDQ OTC FX Futures Market Framework,N962.23mn total Settlement Amount was paid to the ‘Futures Banks’ – the counterparties to the CBN – on the matured NGUS JUL 27 2016 at $/N279 on the maturity date, July 27, 2016.
The CBN has consequently replaced the matured July 2016 contract and has now offered a new 12M contract, NGUS Jul 19 2017, with a total notional amount on offer of $1.00bn at N250 to $1.
Analysts say this is a milestone in the history of the Nigerian FX market, with the OTC FX Futures market having reported remarkable success in its almost one month of existence with over $1.20bn worth of the CBN’s OTC FX Futures contracts across all the tenors.
The profile of the buyers of the contracts includes Foreign Portfolio Investors (FPIs) and importers, among others, who have been trading on the FMDQ OTC FX Futures Trading and Reporting System.
In line with the OTC FX Futures Market Framework released by FMDQ and the FMDQ OTC FX Futures Market Operational Standards, the 1M contract was valued by the Exchange against the Nigerian Inter-Bank Foreign Exchange Fixing (NIFEX) spot rate, which ceased to trade on Wednesday, July 20, 2016.
Clearing operations and settlement for the final variation margins, as valued by FMDQ, were effected through the Nigeria Inter-Bank Settlement System PLC (NIBSS), acting as the clearing and settlement infrastructure for the margining and settlement of the OTC FX Futures contracts.
Meanwhile, the hike in the Monetary Policy Rate (MPR), anchor rate at which the CBN lends to banks by the Monetary Policy Committee (MPC) may have started its positive impact, with over 4,000 percentage or $158million surge in deals at the interbank FX spot market, a day after the decision, data from the FMDQ website show.
Consequently, foreign exchange dealers traded $162.4million in 33 spot deals between Tuesday and Wednesday, compared to thin trade of $3.560million recorded the preceding Monday in six deals.
Nigeria’s currency traded at an average of N316.93/USD on Thursday, as at 2.39 PM, FMDQ data showed. At the FX interbank spot market, the local currency reached a high of N340.46/USD and a low of N283/USD yesterday. Dealers traded $23.414million on Thursday in 12 deals.
Charlie Robertson, global chief economist at Moscow-based Renaissance Capital said “Nigeria FX is closer to the market clearing rate and long-term fair value (315-320/$) on a 20 year average Real Effective Exchange Rate (REER) model”.
“The key point is that Africa is back – with two of the three biggest economies (Nigeria and Egypt) now making themselves investable again, after an overly long period where FX policy deterred investors. As we progress through 2H16, it is worth re-examining Africa again,” Robertson said.
Michael Famoroti, economic research analyst at Vetiva Capital Management, in recent commentary said the move by the MPC is positive for the naira in the short-term “but note that longer-term, it is in addressing the structural defects in Nigeria’s export sectors that will ensure a viable currency market.
“We expect that following this decision, the interbank market rate could retrace closer to the N300/USD level and if the CBN’s move to redirect liquidity via banks to Bureau De Changes (BDCs) proves successful, the gap between the interbank and parallel market rate could narrow in the coming weeks,” the Vetiva analyst added.
The prices of oil, Nigeria’s biggest source of revenue steadied just above three-month lows on Thursday, as producers continued to pump more than needed, filling inventories, and economic growth prospects darkened.
Brent crude oil was down 35 cents at $43.12 a barrel by 1335 GMT, after touching $42.88, its lowest since April 20. U.S. light crude was down 15 cents at $41.77.
“Having introduced a flexible exchange rate policy, we expect the current move by the CBN to raise interest rates to positively affect the foreign exchange market as we anticipate that more foreign direct investments (FDI) will begin to flow into the country, targeting investments in Government securities which will now return higher. This should immediately improve liquidity in the FX market and reduce volatility,” said research analysts at Lagos-based Capital Bancorp Plc.
Naira-Settled OTC FX Futures contracts are essentially non-deliverable Forwards (NDF) contracts where parties agree to an exchange rate for a predetermined date in the future, without the obligation to deliver the underlying US Dollar (notional amount) on the maturity/settlement date.
Upon maturity, both parties are assumed to have transacted at the Spot FX market rate.
Since these contracts are cash- settled in Naira, there is no physical delivery of the underlying currency to the counterparties, in this case the CBN and the Authorised Dealers.
The differential between the OTC FX Futures contract rate and the NIFEX Spot rate on the settlement day determines the Settlement Amount, the gain/loss inherent in the contract; and the party that would have suffered a loss with the NIFEX Spot FX rate is paid the Settlement Amount in Naira, thus ensuring that both parties in purchasing or selling the US Dollar in the Spot FX market will achieve an effective rate equal to the NDF rate that had been guaranteed to each other via the trade in the OTC FX Futures contract.
To facilitate the operational efficiency of the Futures market, the CBN, on June 24, 2016, issued a circular on ‘Externalisation of Differentials on OTC FX Futures Contracts for FPIs’, thus providing an avenue for this category of end-users, upon presentation of an FMDQ-issued Settlement Advice and a Certificate of Capital Importation, to repatriate the Settlement Amounts of the OTC FX Futures contracts. Similarly, on July 22, 2016, the apex Bank released another circular mandating the sale of foreign currency proceeds of international money transfers by banks to the Bureaux-de-Change (BDC) operators, who will in turn sell the proceeds to retail end-users.
Thus serving to ease the demand pressure for FX in the BDC market and improving the value of the Nigerian Naira against the US Dollar.
Meabwhile in its continued efforts aimed at bringing back liquidity into the Nigerian FX market, attracting foreign investors and shoring up the contracting economy, the Central Bank revised its quotes on the OTC FX Futures market on July 27, 2016.
A month after the launch of the product, the OTC FX Futures market has witnessed significant buy-in from the market, with c. $1.33bn of contracts purchased in the first month, considerably reducing front-loading in the spot market and promoting hedging
Although the Spot FX rate depreciated 14.73 percent between June 27 (N281.49) and July 27, 2016 (N330.12) and yields on the 1-year and 3-month bills (Jul-6-2017 & Oct-20-2016) recorded 7.20 percent and 4.13 percent hikes over the same period, OTC FX Futures quotes by the CBN were adjusted to remain competitive in furtherance of the strategy to attract foreign investors into the domestic market.
Changes along the OTC FX Futures curve were asymmetric, with significant adjustment at the short-end of the curve.
NGUS APR 26 2017, previously quoted at N210.00 (the lowest priced contract), is now quoted at N260.00, reflecting a 23.81% increment in the price – the largest change across the curve.
Patrick Atuanya & IHEANYI NWACHUKWU
Crude Oil: Nigerian Government Set to Reopen 180,000bpd Trans Niger Pipeline
The Federal Government is set to re-open the Trans Niger Pipeline which has a production capacity of 180,000 barrels of crude oil per day.
Six months after the Trans Niger Pipeline (TNP) was shut down due to vandalism and oil theft, the Federal Government is set to re-open the pipeline which has a production capacity of 180,000 barrels of crude oil per day.
Investors King learnt that Trans Niger Pipeline (TNP) serves as part of Nigeria’s gas liquids evacuation infrastructure, which is vital for domestic power generation and the export of liquefied gas.
According to a statement released by the General Manager of National Petroleum Investment Management Services (NAPIMS), Mr Bala Bunti on his official Twitter handle, the Trans Niger Pipeline will enhance Nigeria’s oil production capacity.
The General Manager noted that NAPIMS has been in talks with the host communities along the pipeline to bolster security for the crucial oil infrastructure.
“The NAPIMS leadership delegation under the General Manager of Joint Venture operations, Engr Zakariya Budawara, had spent the last one week with the Bodo community in Gokana LGA of Rivers State where the pipeline is situated and runs through”. He said.
Bunti further stated that the people of Bodo have pledged their commitment to ensure the security of the oil infrastructure in exchange for improved quality of life, job creation and capacity building.
It will be recalled that the Trans Niger Pipeline was shut down by Shell Petroleum Development Company because of vandalization and oil theft. It has been moribund ever since because no crude has flown through it.
Investors King had earlier reported that Nigeria’s oil production has been characterised by theft, vandalism and sabotage which has led to a massive drop in production.
Some major oil companies had announced a cease of operation because of vandalism and insecurity.
In July 2022, the Managing Director and Country Chair for Shell Petroleum Development Company of Nigeria Limited, Osagie Okunbor said oil theft was one of the reasons that Nigeria could not meet its OPEC quota of 1.8 million barrels a day.
Similarly, in August 2022, for the first time in five years, Nigeria lost its crown as Africa’s largest oil producer to Angola.
Clean Energy: Over 70,000 People to Benefit from Africa Mini-grids Program
Over 70,000 Nigerians will benefit from its recently launched Africa Mini-grids Program (AMP) instituted to enable access to clean energy
The federal government of Nigeria has said over 70,000 Nigerians will benefit from its recently launched Africa Mini-grids Program (AMP) instituted to enable access to clean energy by increasing the financial viability, and promoting scaled-up commercial investment, in renewable energy mini-grids.
Africa Minigrids Program (AMP) is a project that connects investors with mini-grids stakeholders to help create access to clean energy for the 548 million people in sub-Saharan Africa who currently don’t have access to electricity, which is currently active in 18 African countries.
The Africa Mini-grids Program (AMP) was launched by the federal government through the Rural Electricfication Agency (REA), as the four-year project is funded by the Global Environment Facility (GEF) and supported by the United Nations Development Programme (UNDP) in Nigeria.
Speaking on the launch of the program, the Rural Electrification agency (REA) said, “The Africa Minigrids Program in Nigeria is designed as an enabler project of the REA’s Energising Agriculture Programme (EAP) which aims to advance one of REA’s strategic priorities of focusing on the unserved and underserved to increase economic opportunities through agriculture and productive sectors in rural communities across the country.”
Also commenting on the launch of the program, the UNDP Resident Representative in Nigeria Mr. Mohamed Yahya said: “access to reliable, sustainable, affordable energy is a catalyst to socio-economic development, and in achieving the Sustainable Development Goals (SDGs).
“By scaling up solutions such as renewable energy mini-grids, we will be able to close the energy access gap and unlock opportunities for people in Nigeria and across the region.”
While commending the collaborative spirit of the Agency’s partners and stakeholders that enabled the activation of the program, the Managing Director/CEO of the Rural Electrification Agency (REA), Engr Ahmad Salihijo Ahmad, disclosed that the Africa Minigrids Program will serve as another catalyst for improved access to sustainable energy and equitable and inclusive impact on livelihoods by unlocking agricultural value addition opportunities from electrification.
He added “this sectoral approach is in line with the Agency’s focus on programs to advance the electrification targets and broader social and economic development objectives of the Federal Government of Nigeria.”
In Africa, mini-grids have been identified as a key platform to address critical electrification shortages. Creating successful mini-grid ecosystems beyond pilot projects is now the focus of African governments facing severe shortages, especially for their off-grid populations.
A Busy End to the Week
Stock markets are bouncing back on Friday, although I don’t think anyone is getting excited by the moves which pale in comparison to the losses that preceded them.
By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
Stock markets are bouncing back on Friday, although I don’t think anyone is getting excited by the moves which pale in comparison to the losses that preceded them.
This looks like nothing more than a dead cat bounce after a steep decline over the last couple of weeks as investors have been forced to once again accept that interest rates are going to rise further and faster than hoped.
Double-digit eurozone inflation
Inflation in the eurozone hit 10% in September ahead of schedule, with markets expecting a jump to 9.7% from 9.1% in August. In normal circumstances that may have triggered a reaction but these are anything but normal. Markets are still pricing in a more than 70% chance of a 75 basis point rate hike from the ECB next month with an outside chance of 1%. The euro is slightly lower following the release which also showed core inflation rising a little higher than expected to 4.8%.
Sterling recovers as the UK is revised out of a potential recession
We’re seeing the third day of gains for the pound which has now recovered the bulk of the losses sustained after the “mini-budget” a week ago. This is not a sign of investors coming around the new Chancellor’s unfunded tax-cutting, but rather a reflection of the work done since to calm the market reaction. That includes the emergency intervention from the BoE, talk of measures to balance the cost of the tax cuts, reported discussions with the OBR and rumoured unrest within the Tory party. We’ll have to see what that amounts to and sterling could certainly react negatively again to inaction or the wrong action.
GDP data this morning brought some good news, although as far as positive updates go, this is surely towards the more insignificant end. The UK is not in recession after the second quarter GDP was revised up from -0.1% to +0.2%. While all positive revisions are welcome, the technical recession wasn’t really significant in the first place. The important thing was that the UK is struggling to grow and facing a probable deeper recession down the road and today’s revision doesn’t change that.
Disappointing Chinese surveys
China’s PMIs highlighted the widening gulf between the performance of state-owned firms versus their private competition. It goes without saying that being backed by the state in uncertain times like this carries certain advantages and that has been evident for some time.
Private firms have been more sensitive to Covid restrictions and have therefore been heavily hampered this year. Still, even with those state-backed benefits, the headline PMI was far from encouraging rising to 50.1 and barely in growth territory. With the non-manufacturing PMI also slipping from 52.6 to 50.6, it’s clear that the economy still faces enormous headwinds and the global economy stalling around it will only add to them.
BoJ ramps up bond purchases amid higher yields
The Bank of Japan ramped up bond purchases overnight as it continues to defend its yield curve control thresholds in volatile market conditions. Rising global yields have forced the central bank to repeatedly purchase JGBs in order to maintain its target. There has been a growing expectation that the BoJ could tweak its 0% target or widen the band it allows fluctuations between in order to ease the pressure on the currency but that’s not been forthcoming, with the MoF instead intervening in the markets for the first time since 1998. The intervention doom loop continues.
RBI rate hike and credit line
The Reserve Bank of India hiked the repo rate by 50bps to 5.9% on Friday, in what will likely be one of its final tightening measures in the fight against inflation. The decision was widely expected and followed shortly after by guidance to state-run refiners to reduce dollar buying in spot markets through the use of a $9 billion credit line. The strength of the dollar is posing a risk to countries around the world, as we’ve seen very clearly in recent weeks as mentioned above, and measures like this will seek to alleviate those pressures. Much more will be needed to make any significant difference though.
Oil edges higher into the weekend
Oil prices are rising again as we head into the weekend, with the focus now on the OPEC+ next week. There’s been plenty of rumours about how the alliance will respond to the deteriorating economic outlook and lower prices. A sizeable cut now looks on the cards, the question is whether it will be large enough to offset the demand destruction caused by the impending economic downturn. Not to mention how any cut would work considering the shortfall in output targets throughout this year.
Brent continues to trade around the March to August lows having traded below here over the last week amid recession fear in the markets. We’re now seeing some resistance around $88, perhaps a sign that traders don’t believe OPEC+ will deliver a large enough cut to make a significant difference.
Encouraging but maybe not sustainable
Gold is making gains for a fourth consecutive day after a difficult start to the week. While the recovery has been encouraging, it’s hard to imagine it building on it in any significant way as that would probably require rate expectations to have peaked and inflation perhaps to have as well. While that may be the case, it’s hard to imagine pressure easing from here which may maintain pressure on the yellow metal for a little longer yet.
Key resistance to the upside lies around $1,680 and $1,700, with $1,620 and $1,600 below being of interest.
A period of stability is what bitcoin needs
It’s been a very choppy week in bitcoin which has failed to make a sustainable run in either direction despite attempts at both. Perhaps we are seeing a floor forming a little shy of the early summer lows around $17,500, although that will very much depend on risk appetite not plummeting once more which it very much has the potential to do. I keep using the word resilience when discussing bitcoin and that has very much remained the case. It did also struggle to build on the rally earlier this week, even hold it into the end of the day, so perhaps a period of stability is what it needs.
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