Cost of funds rises further as market awaits statutory allocation

By Babajide Komolafe,

Cost of funds in the interbank money market rose again on Tuesday even as market operators await inflow of N440 billion statutory allocation fund to ease scarcity of funds.

Data from Financial Market Dealers Association (FMDA) indicate that interest rate on Call lending rose by eight basis points to 9.54 from 9.46 per cent. 7 Days lending attracted 9.96 per cent, up by 13 basis points from 9.83 per cent while 30 Days lending rose by 24 basis points to 11.53 per cent to 11.29 per cent.

Vanguard investigation reveal that market liquidity declined sharply following ouflow of about N75 billion for purchase of foreign exchange at the official foreign exchange auction held on Monday.

The situation was aggravated by the delay in the release of the N440 billion statutory allocation for April approved by the Federation Accounts Allocation Committee (FAAC) last week. “The market expected that the funds would have come by now”, market analyst at FMDA told Vanguard

The inflow however may only have moderate impact on market liquidity due to outflow for FGN Bond purchase and foreign exchange purchases today.

The naira however depreciated by 15 kobo at the interbank market on Tuesday as the interbank exchange rate rose to N155.8 from N155.65 per dollar, almost reversing the 25 kobo appreciation of the previous day.

In the international currency scene, the euro traded higher in a choppy session on Tuesday but remained vulnerable against the dollar and weighed down by concerns Greece might restructure its massive debt, a scenario that could damage the euro zone’s credibility.

The $1.40 trading level has kept the euro supported with buying from central banks and hedge funds. The euro was last at $1.4143, down 0.1 percent recovering from a seven-week low of around $1.4048 hit on Monday on trading platform EBS. Some traders said as long as it stayed below its 55-day moving average of $1.4280, it was vulnerable to a test of its recent lows.

“Sentiment on the euro has improved from last week. There is still a slight bias toward selling the euro, but currency managers have started buying it again,” said Pablo Frei, head of multi-manager programs at Quaesta Capital in Zurich, Switzerland.

Quaesta Capital is a currency fund of funds with assets under management of about $3.5 billion.

“It is still a volatile situation, and Greece is still problematic but the $1.40 support level has held and at the end of the day, interest rates at least in the short term are expected to rise faster in the euro zone than in the U.S.” Frei said the prospect of higher interest rates should underpin the euro against the dollar at least this year.

The euro has since slid about 5 percent from that high, as a rout in silver oil and other commodities spooked investors and prompted them to trim dollar-funded bets on risky assets.

Positioning data from the U.S. Commodity Futures Trading Commission showed currency speculators trimmed their net long position in the euro in the week to May 10 but still held relatively large bets on the currency.

The euro earlier drew some support from a solid response to a Spanish bond auction and a mixed German economic sentiment survey.

The euro hit a 17-month peak near $1.4940 in early May, when it was buoyed by market expectations that the ECB would raise interest rates further in the coming months, while the Federal Reserve is expected to keep interest rates near zero this year.

The yen fell broadly as Toshiba Corp. was said to be close to buying Swiss-based Landis+Gyr and media reports said Takeda was in advanced talks to purchase Swiss-based rival Nycomed, developments that were the catalyst for yen selling. The euro rose 0.7 percent to 115.13 yen, while the Swiss franc was up 0.5 percent at 91.81 yen.

The dollar was up 7 percent against the yen at 81.37 yen, with traders citing demand from funds and stops above 82 yen.