FX Gap Spikes as USD Scarcity 'Insults' Naira Devaluation

FX Gap Spikes as USD Scarcity ‘Insults’ Naira Devaluation

The gap between exchange rates at the investors’ and exporters’ foreign exchange window and the parallel market has widened to more than N145. The spread continued to widen, though the naira was devalued to achieve convergence. However, the US dollar (USD) scarcity in the local economy has reduced the possibility of FX rate convergence that drove Nigeria’s currency devaluation in the first place.

On Monday, the Nigerian naira exchange rates diverged between the organised and parallel markets amidst an imbalance between demand and supply levels. After its previous week’s loss, the local currency gained at the Investors’ and Exporters’ FX window.

Data from FMDQ showed that the naira strengthened against the US dollar, trading at N772.12 from N778.42 on Friday at the Investors and Exporters (I&E) windows. However, the parallel market rates worsened further, with a depreciation of 0.27% to N918 as the oil market switched to rally mode. Now, the gap between official and open market rates has increased to N145, supporting speculative activities.

Nigeria’s currency programme has come under criticism as the apex bank is unable to see through its plan to ensure exchange rates converge. The monetary policy has failed to achieve targets across key metrics. Naira Steadies as Banks Issue Update on FX Purchase

With a running inflation rate, and falling local currency, monetary authority has lost touch with the reason for its establishment. It started when the suspended apex bank chief created rapport with the political class – sacrificing the CBN’s independence.

FX shortage challenge has eclipsed the benefits and target of naira devaluation. MarketForces Africa reported that the monetary authority’s decision to float the naira in June was politically motivated. Prior to then, Godwin Emefiele, the suspended and detained CBN Governor had maintained no devaluation stance.

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However, Nigeria’s new president was taunted as reformers swept into action without simulating the impacts of large devaluation of the naira alongside subsidy removal. FX inflows remain unimpressive enough to upturn FX markets. CBN may have to do another devaluation to achieve convergence, analysts told MarketForces Africa.

“While the reforms are necessary, there was no proper calculation, preparation to examine its effectiveness, timing and extent – Does Nigeria expect foreign investors who have been unable to repatriate their funds to bring more?”, LSintelligence Associates said in an email.

On Monday, Brent crude rose 0.47% to $84.88 per barrel, while West Texas Instrument (WTI) crude gained 1.00% to $80.63 per barrel.  Oil futures were higher, driven by improved risk appetite following China’s attempt to stimulate economic activity. 

Elsewhere, gold was hovering around $1,918 per ounce (+0.20%) as traders reacted to hawkish comments from the US Fed Reserve Chair, Jerome Powell, which in turn pushed down US treasury yields. #FX Gap Spikes as USD Scarcity Insults Naira Devaluation

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