Naira Lost 43% in 1-Month as Hot Money Shifts Base
The naira lost about 43% of its value in the foreign exchange market as volume of US dollar in the currency markets dried up. The unmet return on hot money caused foreign investors’ earlier exits.
Data tracked from the apex bank’s website showed there were inflows into the external reserves since the balance hit a low of $32.106 billion on April 19, 2024. High debt service costs on foreign debts settled by the apex bank dragged the nation’s net forex reserves balance lower.
“Nigeria maintains external reserves to be able to settle foreign obligations,” Yemi Cardoso, the Central Bank governor, said in a reaction to a claim that the apex bank has been using external reserves to defend the naira. Last week, the gross external reserves printed higher at $32.642 billion as the monetary authority halted its FX market intervention – despite weak crude oil production volume and fluctuating price per barrel in the global commodity.
In the first quarter of 2024, the apex bank used attractive spot rates on Nigerian Treasury bills sold to attract the attention of foreign investors to the economy. The Central Bank of Nigeria’s (CBN) OMO bill was also priced higher, resulting in an influx of hot money.
The era of higher spot rates seems to have marinated as the CBN slows down auction rates, leaving foreign investors high and dry in contrast to their expectations of possible interest rate repricing. In 2024, Nigeria has increased benchmark interest rate by 6% to anchor inflation. Ahead of its policy meeting, investment banking firm have projected another 100 basis point hike in the interest rate.
According to data from the FMDQ Securities Exchange, the official FX rate was down by 42.99% from N1,072.74 per US dollar in April 17 to N1,533.99 per greenback on May 17. In the parallel market, the naira fell by 34.0% to N1,515.00 as of May 16 from a low of N1,000.00 as of April 16.
Due to their respective trend observations, which formed the basis for their predictions, some naira bulls predicted that the exchange rate would rebound strongly after the exchange rate ran amok near N1900 in the first quarter of 2024. The CBN maintained its stance that the naira is grossly undervalued. Investment firms have been emphasizing weak FX supply as a major impediment to naira strengthening in the currency market.
Goldman Sachs, Financial Derivatives Company (FDC), and Renaissance Capital had projected a bull line would be formed around N1000, except for FDC analysts, who valued the local currency at N910.10. On the back of US dollar sales at a subsidized spot rate to currency traders in the informal market, the naira had strengthened strongly. The local currency became the world’s best performer before the twist seen in the forex market in May.
Exchange rates appreciated for three weeks in April across the forex markets, causing the naira to win its first ever laurel in the global market. As the CBN ran out of buffer on account of a weak net FX reserve, foreign currency injections became irregular, creating fresh entry points for currency speculators.
Forex market liquidity positions drive exchange rate movements, analysts said, noting that foreign investors moved out due to elevated rates in the global markets. “The naira could not survive pressures from sustained demand for US dollar and other foreign currency due to the inability of the monetary authority to sustain FX injection to banks, and bureaux de change operators (BDCs)”, LSintelligence Associates said told MarketForces Africa in a chat.
The naira halted its three-week streak of appreciation in April after the heightened war in the Middle East, particularly Iran’s retaliatory attack on Israel on April 13, triggered foreign investor flight to safe havens, thereby spurring capital outflows and mounting demand pressure in the FX market.
In a note, Cordros Capital Limited told investors that they think that concerns about the CBN’s low net FX reserves and the defense of the naira sparked risk-off sentiments amongst foreign investors and limited inflows from Foreign Portfolio Investors (FPIs).
Indeed, FX inflows into the Nigerian autonomous foreign exchange market fell by 48.1% to $1.95 billion in April from $ 3.75 billion in March 2024, with inflows from foreign sources particularly foreign portfolio investors (FPIs) declining by 68.9% to $478.10 million from $1.54billion in the previous month.
“We also note that despite weak inflows from FPIs, the CBN’s intervention in various market segments has remained frail and irregular, given its weak net FX reserves”. Monthly report from FMDQ revealed that total inflows from the CBN into the NAFEM market declined by 35.1% to $ 98 million from $151 million.
“…whilst the CBN maintained dollar sales to BDCs and commercial banks, the total sum of FX supplied remained insufficient to alleviate the pressure in the FX market”, Cordros Capital said in its note. FX Inflows Down 69% as Foreign Investors Pullback
Latest data from FMDQ showed that exchange rate improved. The naira settled at to N1,497.33 at the Nigerian Autonomous Foreign Exchange Market. #Naira Lost 43% in 1-Month as Hot Money Shifts Base Germany, Nigeria Trade Relations Hits €3bn – Envoy
