Naira Falls across FX Markets as Devaluation Tantrum Gets Louder
There is no respite for the Nigerian local currency, the naira, as exchange rates worsen across foreign exchange markets. In the just concluded week, the naira found a new exchange rate level at N437 above while higher demand for foreign currencies drove the US dollar to N740 in the black market.
The weakening local currency has reduced the investment weights of naira assets across the financial markets. This, plus inflation rate worries have lowered investors’ interest in the naira assets amidst a dearth of alternative investment options for value hunters.
Last week, Naira fell across all market segments as it depreciated 0.16% week on week to N437.03 at the Investors and Exporters FX Window from N436.33 in the previous week. Meanwhile, the exchange rate hit another multi-year low of N740/$ at the parallel market, depreciating 3.93% week on week from N712.
Analysts attribute the depreciation of the local currency to an unending demand for foreign currencies and the need to hedge against naira depreciation following the recent interest rate hike by the apex bank.
In its market note, analysts at Cowry Asset said the difficulties experienced by the offshore communities in repatriating funds and further expectations for a fall in the local currency have spurred this continued depreciation.
“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 stated.
Analysts said they expect the Naira to trade relatively calm across all segments of the FX market in the face of growing dollar demand pressure for BTA and PTA respectively while the CBN continues its weekly intervention in the FX market to save the Naira.
At the Investors and Exporters FX window, total turnover declined by 1.4% week to Thursday close, settled at $520.32 million, with trades consummated within the N410.00 – N453.15 band.
In the Forwards market, the naira depreciated by 1.7% to N446.77 per dollar for a 1-month contract, lost 2% to N453.14 for a 3-month contract and a 6-month contract rate depreciated by 2.2% to N467.92. READ: Analysts See No Respite for Naira as FX Intervention Tumbles 28%
In the forward market, the exchange rate for a 1-year contract deprecated by 2.3% to N495.21. In analysts’ opinion, the CBN has enough liquidity to support the FX market over the short term. However, Cordros Capital analysts highlight that foreign inflows are paramount for sustained FX liquidity over the medium term.
Moreover, considering the tepid accretion to the reserves given the low crude oil production level and elevated PMS under-recovery costs, FPIs that historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long term.
“We think further adjustments in the exchange rate peg closer to its fair value and flexibility in the exchange rate would significantly attract foreign inflows back to the market”, Cordros Capital said in a market note. #Naira Falls across FX Markets as Devaluation Tantrum Gets Louder
