Naira Falls as High FX Spreads Raise Arbitrage Opportunity
Nigeria’s local currency, naira, tumbles to N530 a dollar, from N525 in the parallel market as high spreads raise arbitrage opportunities in the foreign exchange market. The difference between the private sector’s driven currencies markets and CBN’s official currencies trading platforms is now close to N120.
While there is a possibility of about $10 billion inflow, the nation’s external reserve maintained an uptrend in the just concluded weak, but this was unable to stem naira from further depreciation, though banks maintain stable FX rate at N413.
Due to the widening gaps in FX rates in the currency markets, analysts see traders exploiting the multi-tiered quotes…sustains gap in foreign exchange gives room for Arbitrage opportunity, Cowry Asset Management said in a note.
Though, banks have explained to customers via emails that any breach of current foreign exchange policy would be treated as financial crime, citing that Central Bank would apply an appropriate sanction to customers that divert FX.
As foreign inflow jumps, Naira appreciated against the greenback by 0.1 per cent to N411.50 at the investors and exporters foreign exchange window amidst increase demand.
While the central bank thinks the parallel market is not a good yardstick for measuring naira strength in the currencies market, investment analysts believe the market provides a better indication of real exchange condition.
Multiple exchange rates however make local currency index-tracking difficult due to multiplicity while spreads between CBN’s rate and Bureau de change rates have widened further after the apex bank decision to cutoff operators from recognised FX chain.
Arbitrage value between banks rate and parallel market rates closed the weak at N117 on each dollar, and could further increase if CBN fails to raise supply and reduce bureaucracy in FX access via banks, analysts said.
“You cannot really keep a tab on multiple quotes for a local currency without someone somewhere cash in from the multi-tiered exchange rate system. Nobody is holy, and nobody is guilty until further notice.
“The right thing to do is to unify the exchange rate. There will be pressure in the economy but has there not been pressure over time? How many times has CBN devalued naira in the last six years?” an investment expert told MarketForces Africa.
The apex bank, with efforts geared at converging foreign exchange rates, maintains a multi-tiered policy that allows multiple quotes in currencies markets with $210 million weekly injections to keep naira strong.
Meanwhile, the exchange rate closed flat at N380.69 at the Interbank Foreign Exchange market amid weekly injections of US$210 million by CBN into the forex market.
A total sum of US$100 million was allocated to wholesale secondary market intervention sales (SMIS), US$55 million was allocated to small and medium scale enterprises and US$55 million was sold for Invisibles.
In the new week, analysts at Cowry Asset expect the Investors and Exporters FX rate to depreciate marginally amid demand pressure.
However, given the sustained demand pressure at the Bureau De Change and the parallel markets, analysts see a sustained exchange rate gap which continues to give room for arbitrage opportunity.
In the week, Nigeria’s FX reserve sustained its weekly accretion closing higher by US$438.35 million from the previous week to settle at US$34.10 billion.
At the Investors and Exporters Window, total turnover or dollar volume transacted at the investors’ window increased by 19.0% from the beginning of the week to USD926.51 million.
Analysts at Cordros Capital said in a report that trades in the space were consummated within the N400.00 – 449.99 to a dollar band.
In the forwards market, the exchange rate depreciated -0.4% to N413.25 at the 1-month, -0.8% to N417.68 at 3-month, 1.2% to N423.91 at 6-month, and -1.8% to N436.29 at the 1-year contracts.
“We expect improved liquidity in the investors and exporters foreign exchange window over the medium term, given an expectation of increased oil inflows in line with the rise in crude oil prices and inflows from foreign currency borrowings”, analysts projected.
After lawmakers approved foreign currency borrowings totalled US$6.18 billion, Nigeria moved to appoint Bookrunners and financial advisers in August for the Eurobond issuance schedule for October 2021.
Also, Nigeria is open to raising an additional US$3.40 billion if the country exercises the right following the International Monetary Fund’s $650 billion special drawing rights to cushion the effects of covid-19 on the global economy.
“We expect the naira to remain relatively range-bound N410.00– N415.00 a dollar at the investors and exporters window”, Cordros analysts estimated.
Read Also: FX Arbitrage: CBN Will Have to Make Big Call on Devaluation
In the just concluded week, the Central Bank announced Bitt Inc. as a technical partner for the electronic or digital currency, e-naira, which is scheduled to launch in October 2021.
“Although the CBN’s decision to digitise the Naira started in 2017, we believe the rapid rise in the use of digital payments (exacerbated by the pandemic) has led the CBN to intensify its efforts to bring the project forward.
“Besides, we understand that over 85 per cent of Central Banks around the globe are now considering adopting digital currencies in their countries. We believe digital currencies’ purported benefits remains hypothetical for now, given that the global rollout of digital currencies is still at an early stage.
“For instance, factors such as technological illiteracy, privacy concerns, and limited trust in the monetary authority could deter significant adoption of the e-Naira”, Cordros Capital said.
Based on their separate reports, some analysts think that e-naira will accelerate financial inclusion, increase cross-border trade, improvements in monetary policy effectiveness, and payment systems efficiency.
Most importantly, some pundits believe Nigeria’s digital naira will curb currency arbitration as they observe that pressure on the local currency often emanates from speculative activities.
Naira Falls as High FX Spreads Raise Arbitrage Opportunity
