Naira Steadies at Official Window, Future Rates Worsen
Nigerian naira trades flattish the Investors’ and Exporters’ foreign exchange (FX) window on Tuesday as demand for the United States (US) dollar and other primary currencies steadied amidst angst around the conduct of 2023 presidential election.
A similar FX trade scenario played out in the parallel market. Market traders said the exchange rate steadied at N760 following a slowdown in economic activities amidst an unsettled cloud of clouds of dust over the election and new naira notes scarcity.
Comparatively, the gap between the open market and official rates narrowed to N298, creating an opportunity for currency speculation by saboteurs. In FMDQ Exchange over-the-counter (OTC) FX future, the exchange rate for March 29, 2023, was quoted at N471.38, April 26, 2023, N473.56 and May 31, 2023, is expected to be delivered at N475.75.
Nigerian local currency lost about 11% in 2022. However, investment banking analysts and foreign investors maintained that the Nigerian naira remains overvalued. In its macroeconomic note for 2023, a multi-asset investment banking firm predicted the naira will hit N500 per dollar at the investor window in 2023.
The projection is similar to Meristem Securities expectation best case scenarios exchange rate movement expectation for the year. Based on the number of FX market notes reviewed, Broadstreet consensus remains that the naira is currently trading above its fair value.
Also, a minimum exchange rate has been pegged at N500 – that is N380 away from today’s FX spot rate at the official window. Late last year, Bank of America estimated that the Nigerian naira is overvalued and projected a 20% devaluation for the local currency in 2023.
A devaluation of the naira will have twin effects in the shortest term, drawing an inflow of foreign exchange into the local economy but with adverse effects on Nigerians’ spending.
FX: Non-Deliverable Forward Rate Hits N612/$
Naira overvaluation stretched as the non-deliverable forward rate settled at N612 per United States dollar, according to data from Refinitiv.
Wall Street investment bank JPMorgan closed a key bearish bet on Nigerian assets on Tuesday, saying the risk of potential problems from the West African country’s national elections may be easing, Reuters reported.
Traders should take profits on a long trade on U.S. dollar-Nigerian naira 9-month non-deliverable forwards (NDFs) – a trade that bets on the currency’s official rate falling heavily – JPMorgan said.
“While we still expect the currency to weaken post-elections, we believe the NDF curve in the front-end has appropriately priced this risk,” JPMorgan analysts said in a note to clients.
The 9-month NDF is currently trading at N612 naira to $1, according to Refinitiv data, compared to the official exchange rate of N461 to N462. # Naira Steadies as Investors Price Future Rate at N612
In finance, a non-deliverable forward is an outright forward or futures contract in which counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount. It is used in various markets such as foreign exchange and commodities. # Naira Steadies as Future Rates Worsen
