Doomsday for FX Speculators on Naira Surprise Rebound

Doomsday for FX Speculators on Naira Surprise Rebound

NAIRA EXCHANGE RATE: Doomsday lay ahead for FX speculators in the market as the Naira made a surprise rebound over an expectation that the apex bank’s forex backlog clearing will trigger an improved supply into the Investors and Exporters window.

The Nigerian naira clinches its longest rally, sending the exchange rate to N722 rate after the Central Bank of Nigeria (CBN) gave notice of the foreign exchange backlog owed to local businesses for upstream. Bank of America estimated the naira’s true value at N680.

The majority of analysts said the local currency is currency undervalued, though weak forex supply into the market has always been fingered as a core pressure point for the local currency to hold position against the US dollar dominance.

Amidst a steady rise in the global crude oil market, the market expects strong inflows from international oil companies due to saturating the supply side after the CBN allows operators to trade their FX receipt through the official window.

In addition, the apex bank’s decision to remove the FX backlog from foreign exchange management is expected to send a positive signal to foreign investors; thus, improving FX inflows into the local economy.

“Once supply side improves, and CBN moves to achieve devaluation objective of near single rate, speculative activities would fizzle out”, analysts told MarketForces Africa while reacting to whether it is necessary for the CBN to re-devalued the naira due to the rising FX gap.

The exchange rate is expected to converge around the CBN rate, an expectation that analysts believe supported the CBN move to bring back Bureau de Change operators into the fold to keep the naira steady.  

The naira exchange rate settled at N722.39 per United States dollar at the Investors and Exporters foreign exchange window, according to data from FMDQ, gaining 2.43% week on week. Though declined, volumes of US dollars traded were consummated within the N588.00 – N807.15.

In June, the naira was depreciated by 40.78% to N664.04 versus the US dollar at the Investors, and Exporters foreign exchange window as Nigeria seeks to converge rates.

After the CBN announced a plan to clear the $2.5 billion FX backlog within two weeks, the naira strength came up against the onslaught of the dominant currency, the US dollar. This move indicates an impending increase in the supply of foreign exchange into the market, expected to strengthen the local currency, Cowry Asset Management said.

By the close of the trading week, the naira appreciated by an impressive 2.43% week-on-week at the official market, closing at N722.39 per greenback.  Despite an enviable rally in the official market, the naira depreciated by 1.31% week-on-week to N930 per US dollar.

Analysts said the depreciation of the local currency in the open market was driven by the continued search for the dollar by forex users in alternative forex markets. Flood forex requests passing through the parallel market have been attributed to limited supply from the apex bank. 

As the local currency began a fresh rally following the expectation that the supply side would improve, the naira also consolidated its market position at the forward market. At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the naira exhibited strength against the US dollar across various contract tenors.

Notably, forward rates appreciated by 1.40%, 1.48%, 1.56%, 1.78%, and 2.19% for the 1-month, 2-month, 3-month, 6-month, and 12-month contract tenors, respectively, Cowry Asset Management Limited said in its update.

FX traders at the investment firm explained that this upward movement in forward rates was a result of decreased demand for the US dollar across these various tenors. CBN’s interventions in the foreign exchange market have played a crucial role in maintaining the stability of the Nigerian naira, even in the face of fluctuating oil prices, according to analysts.

Nigeria’s FX reserve declined this week, as the gross reserve position fell by USD181.45 million w/w to close at USD33.39 billion, though crude oil prices maintained an uptrend. Nigeria’s weaker external reserves, according to Fitch Ratings get stuck due to lingering low crude oil production and foreign investors remaining on the sidelines.

Oil rallied after OPEC+ announced an extension of production cuts through the end of 2023 on September 5. This decision is anticipated to tighten the global oil market and provide support for oil prices.

Furthermore, the US Energy Information Administration (EIA) reported a significant decline of 6.3 million barrels in US crude oil inventories last week, surpassing market expectations.

“This development also contributed to the support of oil prices”, analysts said.  It was however noted that concerns linger about weakening demand from China, the world’s largest oil importer, due to a slowing economy and potential government measures to cool it down.

As a response, crude oil prices have experienced a slight increase, with WTI crude trading at $88.55 per barrel and Brent crude at $90.69 per barrel. The price of Nigerian Bonny Light crude oil closed positively at $94.20 per barrel, up from the previous week’s $91.80 per barrel, following the announcement of deeper production cuts by Saudi Arabia and Russia.

At the investors’ and exporters’ FX window, the total turnover at the window decreasing by 63.3% from the beginning of the week to USD292.02 million on Thursday.

“While we understand that the NNPC’s crude repayment facility with the African Export-Import (AFREXIM) bank may have been put on hold, we highlight that there have been no further positive news flows regarding other measures to stem the slide of the naira”, Cordros Capital analysts said in an update.

Analysts maintained a stance that FX liquidity constraints will continue to linger in the short term, ensuring the local currency pressures remain intact. Cowry Research anticipate the naira to trade in the positive band to show further appreciation at the various FX markets barring any distortions while the apex bank maintains its interventions to shore up the naira value.

MarketForces Africa reported that in less than seven years, the Nigerian naira has lost N464.67 or 233% of its purchasing power to persistent devaluation, according to analysts at Cowry Asset Management Limited. #Doomsday for FX Speculators on Naira Surprise Rebound Naira Gains as CBN Limits Tenure of Banks Chiefs