LONDON: Nigeria's naira traded just off record lows versus the dollar in the non-deliverable forwards market on Tuesday, with markets betting that a devaluation to tackle a spiralling economic crisis was only a matter of time.
The weakness contrasts with an uptick in general emerging markets sentiment and a rise in oil prices to almost $50 a barrel, which drove MSCI's emerging equity index higher for the second day in a row, with 0.7 percent gains.
Most emerging currencies were firmer, with the rouble benefiting from higher oil prices to rise almost 1 percent while the South African rand and Turkish lira also inched off two-month lows to the dollar .
Nigerian markets however are under increasing pressure as an acute shortage of hard currency caused by a frozen exchange rate has crippled fuel imports. Importers scrabbling for dollars have pushed the naira to 324 per dollar on the black market versus the spot market rate of around 198.
In addition the country's oil output has fallen almost 40 percent due to militant attacks in the Niger delta.
In the NDF market, used to hedge against future exchange rate moves, the naira has weakened steadily with one-month contracts falling on Monday to record lows beyond 245 per dollar and standing around 235 on Tuesday.
It was trading around 202 a week ago.
Three-month naira NDFs meanwhile hit record lows of almost 265 per dollar.
Renaissance Capital's global chief economist Charles Robertson said authorities would be reluctant to float the naira and may instead introduce Venezuela-style dual-exchange rates, with an officially endorsed parallel rate around 285 per dollar.
"We still think the authorities are likely to accept the economic requirements for a weaker currency," Robertson said.
"(But) the option looking least likely is that they do the CIS model of the last 18 months - Russia, Azerbaijan, Kazakhstan - where they float the currency, because President Buhari has been strongly identified with holding the currency where it is at 200 to the dollar."
There are also expectations of interest rate hikes to tackle inflation that hit six-year highs of 13.7 percent last month. The central bank raised rates by 100 basis points in March.
"We believe more hikes will be required and do not expect inflation to stabilise as long as the (central bank's) unconventional monetary and exchange rate policies remain in place and the resulting capital controls are not lifted," Goldman Sachs told clients.
In emerging Europe, the picture is brightening in Russia, with data on Monday showing the economy's contraction was easing, helped by oil's rebound since February.
Russian 10-year yields rose slightly however after touching new 22-month lows on Monday as deputy central bank governor Dmitry Tulin said it was important not to rush with rate cuts. Markets have been betting on a cut in June after the central bank has held rates for almost a year.
But Tulin's comments are unlikely to deter foreign investors who have been piling into Russian debt.
"We like the look of the local currency bonds in the medium term - you're getting 9 percent yield on a currency that's fair value," Robertson said.
The Polish zloty touched a new three-week high versus the euro, while Warsaw stocks rose to one-week highs, extending Monday's rally on relief that Moody's had not cut the country's credit rating.
The Serbian dinar was flat versus the euro ahead of a central bank meeting that could either cut interest rates due to easing inflation, or leave them on hold until the formation of a new government in June.
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