Naira Tumbles as CBN Plays Down FX Market Valuations
The Nigerian local currency, naira, depreciates across foreign exchange market segments this week amidst supply shortage as the central bank trivializes valuation, saying it worries about supply.
The multi-tiered exchange rate system introduced by Godwin Emefiele, the central bank governor in 2016 following oil shocks has affected investors’ view of the Nigerian economy.
With capital control measures introduced to stem the local currency from free-falling, foreign investors have continued to sideline Nigeria as an investment destination compared to the historical trends.
Recently, the apex bank moved to converge exchange rates and also stopped its weekly dollar supply to bureaux de change, a similar trend witnessed in 2016 amidst dollar pressure.
Some investment analysts see the apex bank move as a Trojan horse, noting that the central bank has not actually been stable with its monetary policy without a political undertone.
Amidst low inflow into the external reserves despite steadies global prices of oil, dollar supply has remained low, which has continued to pressure the local currency in the FX markets.
A central bank official, director of monetary policy, Hassan Mahmud said during the week that the apex bank is worried about boosting dollar supply on the currency market and not the valuation of the naira.
“We are not really bothered much about valuation. What we are worried about is the supply side and the confidence in the system,” Mahmud said at a virtual investor conference.
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Meanwhile, data from the FMDQ platform shows that Naira depreciated against the greenback 0.12% to N412 at the Investors and Exporters foreign exchange window despite the $599 million addition to external reserves in the week to $34.78 billion.
Naira depreciated further at the Bureau De Change and Parallel markets by 2.48% and 2.83% to close at N538.00 and N545.00 a dollar respectively amid sustained demand pressure.
FX rate closed flat at N380.69 at the Interbank Foreign Exchange market amid weekly injections of US$210 million by CBN into the forex market.
A total sum of $100 million was allocated to Wholesale Secondary Market Intervention Sales (SMIS), $55 million was allocated to Small and Medium Scale Enterprises and $55 million was sold for Invisibles, according to Cowry Asset Management Ltd.
Elsewhere, Naira appreciated for all of the foreign exchange forward contracts: 1 month, 2 months, 3 months, 6 months and 12 months contracts increased by 0.12%, 0.12%, 0.09%, 0.21% and 0.47% to close at N412.75, N415.05, N417.31, N423.01 and N434.22 respectively.
However, the spot rate was flat at N380.69 a dollar.
In the new week, Cowry Asset expects the Investors and Exporters FX rate to further depreciate as unmet genuine demand flows to the Parallel market.
“We feel speculators will continue to take advantage of the wide gap between the official and unofficial windows even as investors scramble for USD denominated investment”, analysts added.
Cordros Capital hinted in a market report that total turnover or volume of dollars transacted at the Investors and Exporters window declined by 39.7% from the beginning of the week to $635.71 million, with trades consummated within the N400.00 – 430.00 band.
“We expect improved liquidity in the Investors and Exporters window over the medium term, given our expectation of increased oil inflows in line with the rise in crude oil prices and inflows from foreign currency borrowings and IMF SDR.
“Accordingly, we expect the naira to remain relatively range-bound N410.00 – N415.00 at the Investors window”, analysts projected.
Speaking at the virtual conference, Mahmud said the level of the naira is expected to adjust based on demand but that market failure had made the bank adopt a managed float regime.
