Naira Skids as Foreign Investors US Dollar Demand Clouds Supply
The Nigerian local currency, the naira, lost against the US dollar across foreign exchange markets as FX demand by foreign investors weakened Central Bank sales to banks.
The exchange rate fell by N24.75 amidst daily fluctuations before it closed at $/N1,517.24 per US dollar on Friday. The official market faced huge pressures arising from increasing demand for the US dollar.
In its note, CardinalStone Partners Limited noted that the exchange rate fell as increased demand pressure arising from profit-taking actions by foreign portfolio investors (FPIs) and local corporates offset support from CBN’s intervention at the interbank market last week.
Offshore demand remained strong, pushing rates higher despite the CBN selling over $131.7 million in intervention sales—the second-largest single-day sale this year, AIICO Capital Limited added.
The market opened at N1,510/$ and saw heavy bids, driving the Naira to N1,540/N1,560 by week’s end. Total market turnover reached $320 million, with some trades yet to be recorded.
Overall, the naira weakened by 1.659% week on week, closing at N1,517.24/$ from N1,492.49/$ the previous week. As well, the exchange rate retreated sharply to N1570 in the parallel marker as demand pressures built.
The local forex market has lost the exchange rate convergence it achieved briefly in the recent past, reflecting the fact that the currency market positive traction still hangs on how much the CBN is willing to use to defend the naira amidst FX inflow fluctuations.
According to the data obtained from FMDQ, total inflows into the foreign exchange market declined by 12.9% month on month to USD4.12 billion in February from USD4.74 billion.
This was driven by a broad-based decline across foreign (50.1% of total transaction value) and local (49.9% of total transaction value) inflows, Cordros Capital Limited said in a note.
The breakdown revealed that inflows from foreign sources declined by 10.5% in February to USD 2.07 billion from USD 2.31 billion in January. Analysts said this was caused by 12.5% decline in foreign portfolio investors inflows FPI and 12.3% slowdown in foreign direct investment.
However, the market saw a 172.6% surge in other corporate inflows last month. At the same time, inflows from local sources dipped by 15.1% to USD2.06 billion from USD2.43 billion in January.
This was due to 62.5% monthly declines in inflows from individuals and 36.3% drop in FX supply by the CBN. Also, exporter/importer inflows fell by 22.5% in the month. However, there was a 3.5% increase in inflows from non-bank corporates in February.
“We expect FX inflows to remain robust in the short term compared to previous months, driven by improved market confidence. However, the moderation in yields following the rebased inflation print is likely to dampen carry trade opportunities, restraining FX inflows from FPIs, ultimately affecting overall FX liquidity,” Cordros Capital Limited said in a note.
Elsewhere, analysts at CardinalStone Partners Limited said in an investors note that the Naira has been stable since the start of the year, up by 2.5% year to date, with the parallel market premium disappearing.
“… The downtrend only reflects the servicing of external debt obligations, especially the repayment of 2020 IMF $3.5 billion Covid support under the Rapid Financing Instrument (RFI),” CardinalStone Partners said in a note. The repayment of the 5-year loan began in 2023, with the balance expected this year. #Naira Skids as FPIs US Dollar Demand Clouds CBN FX Sales Treasury Bills Yield Declines as CBN Halts Inflation Fighting
