Markets

CBN Offers New 12-Month Futures Contract of $1bn at N250/$

Published

8 years ago

July 30, 2016

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

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Samed Olukoya

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Gold

Gold Steadies After Initial Gains on Reports of Israel’s Strikes in Iran

Published

8 hours ago

April 19, 2024

Samed Olukoya

Gold, often viewed as a haven during times of geopolitical uncertainty, exhibited a characteristic surge in response to reports of Israel’s alleged strikes in Iran, only to stabilize later as tensions simmered.

The yellow metal’s initial rally came on the heels of escalating tensions in the Middle East, with concerns mounting over a potential wider conflict.

Spot gold soared as much as 1.6% in early trading as news circulated regarding Israel’s purported strikes on targets in Iran.

This surge, reaching a high of $2,400 a ton, reflected the nervousness pervading global markets amidst the saber-rattling between the two nations.

However, as the day progressed, media reports from both countries appeared to downplay the impact and severity of the alleged strikes, contributing to a moderation in gold’s gains.

Analysts noted that while the initial spike was fueled by fears of heightened conflict, subsequent assessments suggesting a less severe outcome helped calm investor nerves, leading to a stabilization in gold prices.

Traders had been bracing for a potential Israeli response following Iran’s missile and drone attack over the weekend, raising concerns about a retaliatory spiral between the two adversaries.

Reports of an explosion in Iran’s central city of Isfahan further added to the atmosphere of uncertainty, prompting flight suspensions and exacerbating market jitters.

In addition to geopolitical tensions, gold’s rally in recent months has been underpinned by other factors, including expectations of US interest rate cuts, sustained central bank buying, and robust consumer demand, particularly in China.

Despite the initial surge followed by stabilization, gold remains sensitive to developments in the Middle East and broader geopolitical dynamics.

Investors continue to monitor the situation closely for any signs of escalation or de-escalation, recognizing gold’s role as a traditional safe haven in times of uncertainty.

Commodities

Global Cocoa Prices Surge to Record Levels, Processing Remains Steady

Published

9 hours ago

April 19, 2024

Samed Olukoya

Cocoa futures in New York have reached a historic pinnacle with the most-active contract hitting an all-time high of $11,578 a metric ton in early trading on Friday.

This surge comes amidst a backdrop of challenges in the cocoa industry, including supply chain disruptions, adverse weather conditions, and rising production costs.

Despite these hurdles, the pace of processing in chocolate factories has remained constant, providing a glimmer of hope for chocolate lovers worldwide.

Data released after market close on Thursday revealed that cocoa processing, known as “grinds,” was up in North America during the first quarter, appreciating by 4% compared to the same period last year.

Meanwhile, processing in Europe only saw a modest decline of about 2%, and Asia experienced a slight decrease.

These processing figures are particularly noteworthy given the current landscape of cocoa prices. Since the beginning of 2024, cocoa futures have more than doubled, reflecting the immense pressure on the cocoa market.

Yet, despite these soaring prices, chocolate manufacturers have managed to maintain their production levels, indicating resilience in the face of adversity.

The surge in cocoa prices can be attributed to a variety of factors, including supply shortages caused by adverse weather conditions in key cocoa-producing regions such as West Africa.

Also, rising demand for chocolate products, particularly premium and artisanal varieties, has contributed to the upward pressure on prices.

While the spike in cocoa prices presents challenges for chocolate manufacturers and consumers alike, industry experts remain cautiously optimistic about the resilience of the cocoa market.

Despite the record-breaking prices, the steady pace of cocoa processing suggests that chocolate lovers can still expect to indulge in their favorite treats, albeit at a higher cost.

Crude Oil

Dangote Refinery Leverages Cheaper US Oil Imports to Boost Production

Published

10 hours ago

April 19, 2024

Samed Olukoya

The Dangote Petroleum Refinery is capitalizing on the availability of cheaper oil imports from the United States.

Recent reports indicate that the refinery with a capacity of 650,000 barrels per day has begun leveraging US-grade oil to power its operations in Nigeria.

According to insights from industry analysts, the refinery has commenced shipping various products, including jet fuel, gasoil, and naphtha, as it gradually ramps up its production capacity.

The utilization of US oil imports, particularly the WTI Midland grade, has provided Dangote Refinery with a cost-effective solution for its feedstock requirements.

Experts anticipate that the refinery’s gasoline-focused units, expected to come online in the summer months will further bolster its influence in the Atlantic Basin gasoline markets.

Alan Gelder, Vice President of Refining, Chemicals, and Oil Markets at Wood Mackenzie, noted that Dangote’s entry into the gasoline market is poised to reshape the West African gasoline supply dynamics.

Despite operating at approximately half its nameplate capacity, Dangote Refinery’s impact on regional fuel markets is already being felt. The refinery’s recent announcement of a reduction in diesel prices from N1,200/litre to N1,000/litre has generated excitement within Nigeria’s downstream oil sector.

This move is expected to positively affect various sectors of the economy and contribute to reducing the country’s high inflation rate.

Furthermore, the refinery’s utilization of US oil imports shows its commitment to exploring cost-effective solutions while striving to meet Nigeria’s domestic fuel demand. As the refinery continues to optimize its production processes, it is poised to play a pivotal role in Nigeria’s energy landscape and contribute to the country’s quest for self-sufficiency in refined petroleum products.

Moreover, the Nigerian government’s recent directive to compel oil producers to prioritize domestic refineries for crude supply aligns with Dangote Refinery’s objectives of reducing reliance on imported refined products.

With the flexibility to purchase crude using either the local currency or the US dollar, the refinery is well-positioned to capitalize on these policy reforms and further enhance its operational efficiency.