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

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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

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

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Another Turbulent Day

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been another turbulent session after stock markets turned sharply lower on Wednesday as investors fret over the outlook for the economy this year.

Results from Walmart and Target this week have brought into sharp focus the plight facing companies and consumers as inflation begins to bite. And that’s in a country that is still performing relatively strongly with a consumer that still has plenty of savings built up over the last couple of years. Others are not in such a fortunate position.

But inflation is catching up and profit margins are taking a hit. Soon enough though, those higher costs will continue to be passed on and consumers will stop dipping into savings and start being more careful with their spending. There’s a feeling of inevitability about the economy, the question is whether we’re going to see a slowdown or a recession.

The language we’re seeing from Fed officials isn’t filling me with confidence either. We’ve gone from them being confident of a soft landing, to a softish landing and even a safe landing, as per Patrick Harker’s comments on Wednesday. I’m not sure who exactly will be comforted by this, especially given the Fed’s recent record on inflation and past record on soft landings.

And it seems investors aren’t buying it either. A combination of these factors and no doubt more has sent equity markets into another tailspin, with Wall Street registering another big day of losses on Wednesday and poised for another day in the red today. Europe, meanwhile, is also seeing substantial losses between 1% and 2%.

Oil slips as economic concerns weigh

Those economic concerns are filtering through to the oil market which is seeing the third day of losses, down a little more than 1% today. We were bound to see some form of demand destruction if households continued to be squeezed from every angle and it seems we may be seeing that expectation weigh a little as we move into the end of the week.

Meanwhile, China is reportedly looking to take advantage of discounted Russian crude to top up its reserves in a move that somewhat undermines Western sanctions. Although frankly, it would have been more surprising if they and others not involved in them didn’t explore such a move at a time of soaring oil prices.

Still, I expect Brent and WTI will remain very high for the foreseeable future, boosted by the inability of OPEC+ to deliver on its targets and the Chinese reopening.

Gold buoyed by recession fears?

Gold appears to be finally seeing some safe-haven flows as markets react strongly to the threat of recession rather than just higher interest rate expectations. The latter has driven yields higher and made the dollar more attractive while the economic woes they contribute to seem more suited to gold inflows, it seems.

It will be interesting to see how markets react in the coming weeks if the investor mindset has turned from fear of higher rates to the expectation of a significant slowdown or recession. And what that would mean for interest rate expectations going forward. Perhaps we could see gold demand return.

Can bitcoin continue to swim against the tide?

Bitcoin is holding up surprisingly well against the backdrop of such pessimism in the markets. Perhaps because it’s fueled by economic concern rather than simply interest rates. Either way, it’s still trading below $30,000 but crucially it’s not currently in freefall as we’re seeing with the Nasdaq. Whether it can continue to swim against the sentiment tide, time will tell.

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Inflation Hits 40-Year High

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

European equity markets are a little flat on Wednesday, with inflation data this morning once again offering a reminder of the struggles that lie ahead.

Not that we need reminding given all of the data we’ve seen recently. And then there are the gloomy forecasts from central banks, with even the Fed now targeting a softish landing which feels very much like the stage before a mild recession. It may be time to buckle up and prepare for a very bumpy year.

Will BoE move to super-sized rate hikes?

UK inflation is running at a 40-year high and it’s not peaked yet as the cost-of-living crisis looks set to squeeze the economy into recession. While annual inflation came in slightly below expectations at 9%, pressures are broad-based and as the year progresses, it is expected to hit double figures.

There is still plenty more pain to come for households, most notably when the energy price cap increases again in October. But price increases are broad-based, as evident in the jump in core inflation to 6.2%. This comes as the Bank of England has warned of more pain and a probable recession, as it continues to aggressively raise interest rates in the hope of being able to catch up without inflicting too much harm in the process.

Like many other central banks, it has been heavily criticised for its misjudged faith in pandemic-induced inflation being transient for too long. And in the UK’s case, the problem looks far greater and more widespread, with Brexit effects compounding the problems and driving up prices. Can the BoE afford to continue raising rates so gradually, as markets expect with 25 basis points every meeting or will they be forced to join their US counterparts with super-sized hikes? Pressure is mounting.

Oil higher as China starts reopening

Oil prices are on the rise again as Shanghai takes a big step towards reopening following three days of no new cases in the broader community. Restrictions have been tight in many cities across China which have helped keep a lid on oil prices in this very tight market. But with activity now likely to pick up, crude prices could be on the rise once more.

Efforts toward a Russian oil embargo have failed, with Hungary continuing to stand in the way. That could be slowing the rally in oil still, as could US talks with Venezuela which may eventually lead to additional supply. Although ultimately, this comes at a time when major producers simply aren’t producing as much as they should. Russia saw its output fall by another 9% last month as a result of sanctions, which contributed to OPEC+ producing 2.6 million barrels below target, lifting compliance with cuts from 157% to 220%.

Gold looking shaky once more

Gold is a little lower on Wednesday, as the dollar strengthens once more following a few days of declines. We’ve seen a slight corrective move in the greenback which has eased some of the pressure on the yellow metal but we may be seeing that return already. Gold is currently trading a little over $1,800 and a break of it could trigger another wave lower as investors continue to factor in more interest rate hikes and therefore higher yields.

The path of least resistance

With risk aversion starting to creep back in, bitcoin finds itself back below $30,000 which may make some a little nervous. It was always going to be difficult for risk assets to significantly build on the rally in the current environment. What may be encouraging to some is that we haven’t seen a sharp reaction to the move back below such a key level. Of course, that could quickly change with below appearing to offer the path of least resistance.

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Further Pressure on Central Banks

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a relatively calm start to trading this week, with Europe a mixed bag at the close and the US a little lower.

The weaker Chinese figures overnight will be of some concern at a time of slowing economic activity around the world. Still, as has been the case so often in recent years, the lockdowns will have heavily distorted the data. With lockdowns priced in to an extent, the key will be how quickly restrictions are lifted and then how well the economy bounces back.

Stock markets have come under heavy pressure globally as central banks have been forced to become part of the problem rather than the solution, as has so often been their job in the past. We’ve become very used to easy monetary conditions but now we have a devastating combination of a cost-of-living crisis, looming recession, very high inflation and much higher interest rates.

And as we’re hearing so often now, policymakers understand the pain that households are feeling and will experience going forward but getting inflation back under control is the primary focus. Which means further pain ahead.

The BoE monetary policy report hearing reflected everything we’ve heard in recent weeks as the UK heads for recession and double-digit inflation. Bailey and his colleagues accept how bad the situation in the UK is and the scale of the task at hand but whether they’re doing enough to address it is hard to say. They were among the first to start hiking late last year but have still been criticised for starting too late.

Oil near recent highs after falling on Chinese data

Oil prices have recovered earlier losses that came in the wake of the Chinese figures. While lockdowns have been priced in over the weeks, the numbers were much worse than expected which weighed heavily on crude. While an EU ban on Russian oil suffered another setback as Hungary stood firm against it, the bloc is continuing to work on an agreement while Germany is reportedly planning to phase it out regardless, which could be helping to support prices today.

Oil is trading around $110, towards the upper end of where it’s traded over the last couple of months. China looking to ease restrictions could keep prices more elevated having contributed to them trading at more reasonable levels. A move above $115 in Brent would be interesting, with that having been something of a ceiling for rallies over the last couple of months.

Gold flat but remains under pressure

Gold is flat on the day after slipping this morning below $1,800 for the second time in as many sessions. The yellow metal has been very vulnerable to rising yields and a stronger dollar recently as central banks are forced into much more aggressive action. With the dollar remaining a hot favourite and pressure intensifying on central banks to tackle inflation, gold could remain out of favour for a while yet.

Bitcoin struggles at $30,000

An impressive rebound in bitcoin after breaking $30,000 may already have run its course, with the cryptocurrency giving up earlier gains to trade a little lower on the day. It’s spent a little time over the last couple of days above $30,000 but it is struggling to hang on to them. That doesn’t bode well at a time of risk aversion in the markets and such negative coverage of stablecoins following the Terra collapse. There may be more pain ahead.

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