Naira Bubble Bursting as Markets Re-price FX Rates

Naira Bubble Bursting as Markets Re-price FX Rates

The Nigerian local currency, the naira, bubble continues to burst as forces of demand and supply correct foreign exchange rate pricing across the Nigerian markets. As a result of pressures, the naira has been losing its store-of-value feature as inflation continues to erode value of the local currency.

Investment banking analysts and economists told MarketForces Africa that the risk of holding naira assets has continued to increase due to the rapid depreciation of the local currency across the multi-tiered currencies trading markets.

The sustained weakness of the Nigerian naira has reduced purchasing power, pushing household and corporate spenders in tight. Though the Central Bank of Nigeria has insisted that devaluation is not an option, the naira continues to suffer forced devaluation triggered by excess demand.

MarketForces Africa industries review indicates that companies that depend on imports are having a dirty time in the foreign exchange markets while individuals are lockouts from buying online using debit cards from local banks when payments exceed $20 per month.

Lower foreign exchange inflows driven by the inability of foreign investors to repatriate funds abroad have continued to impact the naira when paired against major currencies like the US dollar, Sterling, Euro and the like.

Naira depreciated further at the Investors’ and Exporters’ foreign exchange (FX) window by 0.50% to ₦441.38 per the United States dollar from ₦439.17, according to data from the FMDQ Exchange platform.

In the parallel market where unmet demand by the local bank is being sourced by locals, the naira also depreciated by 1.09% to close on Friday at ₦743 from ₦735 the previous week as a result of pre-election demand.

Data from the Central Bank if Nigeria showed that external reserves fell below $38 billion mark, lowered by 0.53% from the closing position of $38.11 billion in the previous week to $37.91 billion.

Bureau de change (BDCs) operators said they have seen higher demand for dollars since the campaign for 2023 election was officially started and large invincible demand by Nigerians that could not access dollars from Banks.

The monetary authority has refused to recognise parallel market rates after the CBN stop weekly dollar allocation to BDCs operators a few years ago, citing various infractions including terrorism financing.

Last week, Fitch Ratings said in a report that frontier markets have seen their local currencies depreciating over global recession concerns – though Angola’s Kwanza has gained strength following the country’s oil production advantage.

Specifically, Nigeria’s low crude oil earnings and depleting dollar reserves have negative impacts on the local currency pricing in the FX markets. READ:Naira Trades Weak as External Reserve Falls

“As we draw closer to the election year and with the campaign activities by political parties taking full gear already, it is expected that the demand for the greenback will buoy further weakening of the legal tender”, Cowry Asset said in a note.

In the investors’ and exporters’ FX window, market participants maintained bids between N439 and N470.  Also, at the Interbank Foreign Exchange Forward Contracts market, the spot exchange rate traded quietly as it closed the week at N430 from last week’s close.

Exchange rate in the Naira FX Forward contracts Markets depreciated across all tenor contracts except for the 2 months tenor which gained by 0.28% week on week against the greenback to close the week at N451.66 from N452.93 in the prior week.

On the other hand, Cowry Asset analysts said they saw the 1-month, 3 months, 6 and 12 months forward contracts closing the week weaker from last week’s close. Resultantly, the rates dampened by 0.53%, 0.75%, 1.28%, and 1.29% respectively to close the week at N448.30, N455.41, N473.04, and N498.04 in that order.

Analysts expect Naira to trade relatively calm across all segments of the FX market as the recent decision by OPEC+ gradually permeates the global oil market and tickles Nigeria’s reserves with a positive effect on the local currency.

# Naira Bubble Bursting as Markets Re-price FX Rates#

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