Investors Switching into Forward Speculation on Naira

Obinna Chima with agency report 

More foreign investors are switching out of Nigerian bonds into forwards speculating on the naira’s future value, a report has stated.

For instance, Bloomberg cited the case of Bryan Carter, who oversees almost $500 million for Acadian Asset Management Incorporated who is also switching out of the Nigerian bonds into forwards speculating on the naira’s future value. Record-high yields on the derivatives imply a 25 per cent loss against the dollar over the next year. This Carter said is too much.

“There’s no reason to believe it would be that bad,” he told Bloomberg, adding that “the perception of Nigeria in the markets has been really battered. But the currency depreciation is largely behind us. It’s a rare opportunity.”

The naira is already the worst performer among 24 African currencies over the past three months and is trading near a record-low. The continent’s largest economy has been hit by the halving in Brent crude prices since the middle of last year and attacks in the north of the country by Boko Haram militants. The postponement of presidential elections scheduled for this month further dented investor confidence. The naira closed at N198 to a dollar on the interbank market on Tuesday.

Nigeria’s currency touched an all-time low of N206.32 per dollar on February 12, 200.77 after tumbling 13 per cent in the past three months.

The “worst-case scenario” is that it will fall “maybe another 10 percent,” said Carter, whose firm specialises in so-called frontier markets.

The implied yield on naira 12-month non-deliverable forwards, which are more accessible to foreign investors because they’re traded offshore and exempt from local dealing restrictions, climbed to a record 39 percent the same day, before falling back to 32 percent. The contracts suggest the naira will weaken to N263 per dollar in a year’s time, data compiled by Bloomberg showed.

Acadian, owned by Johannesburg-based Old Mutual Plc, isn’t the only money manager snapping up naira forwards. Landesbank Berlin Investment GmbH agrees markets are too bearish on Nigeria’s currency and started buying the derivatives early February.

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