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DSS raids on BDCs: Analysts predict increased volatility, fragmentation in parallel market


News » Politics
Nigeria

November.14.2016

Experts have predicted that the recent raids on bureaux de change (BDCs) by operatives of the Department of State Security (DSS) will lead to increased volatility of exchange rate and further fragmentation of the parallel market. Last week DSS operatives raided offices of BDCs in some part of Lagos and Abuja, arresting operators that sell above the exchange rate stipulated by the Central Bank of Nigeria (CBN).

DSS Analysts however noted that while this may facilitate appreciation of the naira in the parallel market in the short term, it would lead to further fragmentation in the market as well as increase volatility of exchange rate.

According to analysts at Afrinvest, a Lagos based investment firm, “In the interim, we expect recent developments to constrain supply at the BDC/Parallel segments as operators withhold supplies. We imagine the possibility of this also leading to further fragmentation of the FX market, taking the parallel market further underground in view of the close scrutiny by security agencies.

Thus, whilst parallel market rate could strengthen in the interim, the medium term outlook points to a more volatile currency.” Analysts at Meristem Securities Limited also predicted that the appreciation of the naira induced by the raids cannot be sustained. Speaking in the company’s Weekly  Investment Guide, they stated: “recent developments in the parallel market have seen market operators being strictly regulated by security operatives, and consequently resulted in the currency appreciating in that segment of the market.

By the end of the trading week, the naira pegged at a selling rate of N455 per dollar at parallel market, representing an appreciation of 3.30 percent Week-on-Week (WoW). We expect further appreciation of the currency in the parallel market over the short-term, but acknowledge that it may not be sustained for a prolonged period of time.

” Scarcity of Funds rattles interbank Meanwhile interbank interest rates rose sharply last week due to intense scarcity of funds prompted by outflow for foreign exchange transactions.  Analysts at Afrinvest however predicted a moderation of interbank interest rates by the end of this week. 

They stated:  “Money market rates operated within a tight band at the start of the week but rose significantly towards the end of the week on account of tight financial system liquidity. In the absence of substantial inflows, the Apex Bank also held fire on primary market activities during the week.

Open Buy Back (OBB)  and Overnight  ( O/N)  rates opened at last Friday’s close of 13.0 percent and 13.5 percent, closing flat on Monday but increased marginally on Tuesday. The impact of the tight system liquidity was however observed by midweek as OBB and O/N rates jumped 5.5 percentage points apiece to close at 19.2 percent  and 19.5 percent at the end of Wednesday’s trading session. This uptrend continued on Thursday, as OBB and O/N rates further rose 3.5 and 3.7 percentage points to close at 22.7 percent and 23.2 percent respectively.

Interbank lending rates inched higher on Friday, with OBB and O/N rates closing the week at 25.7 percent and 26.3 percent. In the week ahead, we expect money market rates to trend northwards at the start of the week but moderate towards the end of the week on the back of a scheduled N119.9 billion  and N140 billion  in Net T-bills and OMO maturity. We also expect the Apex Bank to mop up liquidity through OMO auctions accordingly, in addition to the T-bills auction scheduled for Wednesday.

Read more at: Experts have predicted that the recent raids on bureaux de change (BDCs) by operatives of the Department of State Security (DSS) will lead to increased volatility of exchange rate and further fragmentation of the parallel market. Last week DSS operatives raided offices of BDCs in some part of Lagos and Abuja, arresting operators that sell above the exchange rate stipulated by the Central Bank of Nigeria (CBN).

DSS Analysts however noted that while this may facilitate appreciation of the naira in the parallel market in the short term, it would lead to further fragmentation in the market as well as increase volatility of exchange rate.

According to analysts at Afrinvest, a Lagos based investment firm, “In the interim, we expect recent developments to constrain supply at the BDC/Parallel segments as operators withhold supplies. We imagine the possibility of this also leading to further fragmentation of the FX market, taking the parallel market further underground in view of the close scrutiny by security agencies.

Thus, whilst parallel market rate could strengthen in the interim, the medium term outlook points to a more volatile currency.” Analysts at Meristem Securities Limited also predicted that the appreciation of the naira induced by the raids cannot be sustained.

Speaking in the company’s Weekly  Investment Guide, they stated: “recent developments in the parallel market have seen market operators being strictly regulated by security operatives, and consequently resulted in the currency appreciating in that segment of the market.

By the end of the trading week, the naira pegged at a selling rate of N455 per dollar at parallel market, representing an appreciation of 3.30 percent Week-on-Week (WoW). We expect further appreciation of the currency in the parallel market over the short-term, but acknowledge that it may not be sustained for a prolonged period of time.” Scarcity of Funds rattles interbank Meanwhile interbank interest rates rose sharply last week due to intense scarcity of funds prompted by outflow for foreign exchange transactions. 

Analysts at Afrinvest however predicted a moderation of interbank interest rates by the end of this week.  They stated:  “Money market rates operated within a tight band at the start of the week but rose significantly towards the end of the week on account of tight financial system liquidity. In the absence of substantial inflows, the Apex Bank also held fire on primary market activities during the week. Open Buy Back (OBB)  and Overnight  ( O/N)  rates opened at last Friday’s close of 13.0 percent and 13.5 percent, closing flat on Monday but increased marginally on Tuesday.

The impact of the tight system liquidity was however observed by midweek as OBB and O/N rates jumped 5.5 percentage points apiece to close at 19.2 percent  and 19.5 percent   at the end of Wednesday’s trading session. This uptrend continued on Thursday, as OBB and O/N rates further rose 3.5 and 3.7 percentage points to close at 22.7 percent and 23.2 percent respectively.

Interbank lending rates inched higher on Friday, with OBB and O/N rates closing the week at 25.7 percent and 26.3 percent. In the week ahead, we expect money market rates to trend northwards at the start of the week but moderate towards the end of the week on the back of a scheduled N119.9 billion  and N140 billion  in Net T-bills and OMO maturity.

We also expect the Apex Bank to mop up liquidity through OMO auctions accordingly, in addition to the T-bills auction scheduled for Wednesday.

Article Credit: vanguardngr.com

Updated 1 Year ago
 

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Tags:     DSS     BDCs     volatility     parallel     market

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