Dollar crashes to N380/$1 as MPC meets

The dollar yesterday recorded its worst outing in more than three months against the naira, exchanging at N380/$1 in the parallel market. The rate comes ahead of tomorrow’s Central Bank of Nigeria (CBN) led Monetary Policy Committee (MPC) meeting in Abuja. The local currency was exchanging at N385/$1 on Friday and has maintained steady decline in the parallel market, in last one month.

Also, at the official foreign exchange market, the CBN conducted its weekly Secondary Market Intervention Sales (SMIS) auction offering $100 million for spot and short tenored forwards as well as continued its daily Forex interventions in order to stabilize rates and improve dollar liquidity. As a result, rates at the interbank market appreciated from N304.60/$1 at the start of the week to settle at N304.45/$1 on Friday.

The naira’s recovery against the dollar comes as currency speculators continued to lose grip of the market, given CBN’s consistent dollar injections into the interbank and other segments of the market.

At this third meeting of the year, financial pundits expect the MPC committee members to keep interest rate unchanged at 14 per cent; hold on Cash Reserve Ratio at 22.5 per cent and retain of Liquidity Ratio at 30 per cent.

The meeting is also expected to help the MPC review major developments in the global and domestic space, and consider way forward for the local economy.

On the domestic front, there are a number of noticeable signals of a potential rebound in economic activities from the second quarter of this year. April’s Purchasing Managers’ Index (PMI) which settled at 51.1 points highlighted an improvement in overall business activity and reaffirmed that the economy is on its path to recovery. Also, there has been improvement in government finances occasioned by increase in domestic oil production as well as stability in global oil prices.

Similarly, there has been significant improvement in the forex management which in turn has led to a remarkable improvement in forex liquidity and naira’s recovery. The CBN has continued special wholesale and retail interventions as well as the introduction of the SME window and Investors’ & Exporters’ Forex window in which transactions are executed at a market determined rate.

Reacting, Managing Director, Afrinvest West Africa Limited, Ike Chioke, said analysis of the various interesting developments within the economy over the last two months suggests that the May MPC meeting of tomorrow and next is to “mark attendance” as we are of the view that the Committee would be likely satisfied with the recent traction the economy garnered.

Whilst the MPC will likely be comfortable with rate convergence between the parallel market and official rates, the Committee  would reason the need to charge the CBN to revert to the recommendation on flexible foreign exchange framework which was approved since the May 2016 Meeting.

He said the impact of the improvement in liquidity and management of foreign exchange has been evident in the performance of the equities market – which surged to a 10-month high of 28,873.44 points – as foreign investors have started returning to the market while domestic participation has also improved.

“Whilst the recent downtrend in Headline inflation, especially the satisfactory moderation in core inflation from 18.1 per cent in December 2016 to 14.8 per cent in April-2017, could justify a rate cut, we are of the view that the MPC will resist this temptation as this may be premature. Also, reducing MPR at this time will not necessarily reduce the risk perception of the country more so that a higher rate environment would further dampen bank’s appetite towards real sector lending,” he said in an emailed report.

Chioke said reducing Cash Reserves Ratio (CRR) defies monetary policy logic given the frequency of weekly Open Market Operation mop-ups at a significantly high cost. “The latest data show that as at March 2017, Commercial Banks’ Reserves with the CBN settled at N3.3 trillion with CRR at 22.5 per cent. If CRR is reduced by 2.5 per cent to 20 per cent for example, a total injection of N366 billion would be pumped into the system immediately. It will be therefore counter intuitive to reduce CRR that is at no cost to the CBN only to mop-up with OMO at expensive rate. On the flip side, our analysis completely rules out the possibility of a hike in CRR,” he said. Other analysts are of the view that the argument for maintaining status quo and consolidating on recent positives in the economy will be overriding at this May Meeting.

“We believe the operations of the Forex market especially on the recent gains in forex administration will dominate the discourse. However, we do not think there would be a major shift in the current management of the forex market given the massive success and acceptance of the CBN’s policies. “We expect the CBN to continue to consolidate on these gains while sustaining its current momentum at the forex market; hence, we expect rates to remain stable this week,” they said.