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Global carry traders are being lured back to Nigeria by higher yields and new reforms of its foreign exchange (FX) markets by the Central Bank that attracted $1billion of inflows at an auction last week.
“Significant interest from Foreign Portfolio Investors (FPIs) have already begun to supply the much-needed foreign exchange to the economy. For example, upwards of $1 billion in the last few days came in to subscribe to the Nigeria Treasury Bill auction of 1 trillion Naira which saw an oversubscription earlier this week,” Central Bank of Nigeria (CBN) governor, Olayemi Cardoso told lawmakers in a briefing on Friday.
In 2023 currency speculators piled into carry trades — in which they borrow low-yielding currencies in order to purchase higher-yielding alternatives, earning some of the strategy’s best returns in decades as global central banks continued an aggressive pace of rate hikes in the face of mounting inflation.
They however largely shunned Africa’s largest economy Nigeria, where now suspended CBN governor Godwin Emefiele pursued unorthodox policies of low interest rates and an artificially high propped up currency.
Cardoso who took office in September has begun to unwind those policies with hopes of attracting foreign investor inflows.
Last week, the CBN sold one trillion naira ($696 million) in treasury bills to both local and foreign investors at rates that were nearly twice the level of previous offers. Yields for the one-year bill rose to 19%, the highest in 12 years, from 11.5% at the previous auction on Jan. 24.
Three-months bill was sold at 17.24%, which was three times more than the January offer of 5%, while six-month notes fetched 18%.
The 19% rate on the 364-day bills takes it above the central bank’s policy rate, which currently stands at 18.75%, for the first time. It is also narrows the gap on the inflation rate, which stood at nearly a three-decade high of 28.9% in December.
The auction suggests the central bank is seeking to normalize interest rates in Africa’s most populous nation and lure foreign investors in a bid to stabilize the naira.
Looking into 2024, G-10 central banks are preparing to ease monetary policy, sending global yields tumbling with the highest yielders cutting deepest and dragging on carry returns in the process, JPMorgan strategists led by Meera Chandan wrote in the bank’s annual foreign exchange outlook released November 2023.
“2023 will be a year remembered for many things, but for FX market participants it shall forever be known as the golden year for carry,” the report said. “2024 should be the beginning of the end as high-yielders cut most. Declining yields will make carry less attractive and a narrower theme.”
Nigeria is one of a handful of Emerging-market currencies where rates are forecast to rise in 2024, helping to underpin any potential carry returns.
The slump of the Nigerian naira may have also reached its end, opening up buying opportunities for investors.
The Nigerian foreign exchange market is currently facing increased demand pressures, causing a continuous decline in the value of the naira. Factors contributing to this situation include speculative forex demand, inadequate forex supply increased capital outflows, and excess liquidity.
To address exchange rate volatility, a comprehensive strategy has been initiated by the CBN to enhance liquidity in the FX markets.
This includes unifying FX market segments, clearing outstanding FX obligations, introducing new operational mechanisms for BDCs and IMTOs, enforcing the Net Open Position limit, Open Market Operations and adjusting the remunerable Standing Deposit Facility cap among others.
“Distinguished Senators, these measures, aimed at ensuring a more market-oriented mechanism for exchange rate determination, will boost foreign exchange inflows, stabilize the exchange rate, and minimize its pass-through to domestic inflation,” Cardoso said.
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