Naira Reclaims Value Slightly, External Reserves Dip Further

Naira Reclaims Value Slightly, External Reserves Dip Further

The Nigerian Naira traded strongly against the United States dollar this week, appreciating marginally by N0.08 to N436.25 from N436.33 at the Investors and Exporters (IEW) foreign exchange (FX) window amidst expectation that the local currency faces the threat of further devaluation.

Moderate gain seen in the official window was driven by an unsustained slowdown in dollar demand for imports rather than foreign currencies supply from exports inflows amidst rising inflation pressure.

Nigeria will have to earn more foreign currencies than its citizen demand, analysts told MarketForces Africa in a zoom meeting at the weekend while discussing declining foreign interest in the financial markets.

In Mid-year, the MSCII index said it will downgrade Nigerian indexes due to foreign investors’ inability to get the dollar out of the country as the apex bank initiates capital control measures to stem the local currency from falling apart.

With a heavy FX backlog, some foreign airlines recently threatened to halt Lagos flights while some started selling tickets in foreign currencies to travellers.

The monetary authority said devaluation is not feasible in light of local developments but Naira has been facing pressures from rising imports demand. Exchange rate history indicates that the Central Bank of Nigeria’s multi-tiered exchange rate management has been unable to deliver Naira from free falling across the FX markets.

Critics see the loopholes created by the widening gap between official and parallel market rates as a self-inflicted problem that is creating arbitrage opportunities in FX markets. It also appears that the apex bank intervention is not working despite a strong external reserves buffer.

This week, gross external reserves declined, according to data from the Central Bank of Nigeria’s website, amidst low foreign currencies accretion and higher demand across FX markets.

Gross external reserves dropped by $228.63 million to $38.69 billion amidst persistent declines in the price of crude oil for the third straight week. Nigeria repatriates little or no profits from the oil market, according to Cowry Asset.

In its market report, Cordros Capital analysts said the CBN has enough liquidity to support the FX market over the short term, they highlighted that foreign inflows are paramount for sustained FX liquidity over the medium term.

“Considering the tepid accretion to the reserves given the low crude oil production level and elevated PMS under-recovery costs, foreign portfolio investments (FPIs) that historically supported supply levels in the Investors window will be needed to sustain FX liquidity levels in the medium to long term.

“Hence, we think further adjustments in the Naira to US dollar exchange rate peg closer to its fair value and flexibility in the exchange rate would be significant in attracting foreign inflows back to the market”, the investment firm said in a note.

Broadstreet analysts’ report indicates there is a general feeling that the Nigerian naira is relatively overvalued. However, the Central Bank of Nigeria has maintained its stance not to devalue the local currency.

MarketForces Africa gathered that downward repricing of the local currency would worsen the poverty level, and tempers aggregate consumption. Analysts said this is expected to have impacts on the private sector as a shift in production costs would impact volume.

“Devaluation of naira could trigger further job losses, impact price level with overall drag on economic growth and market general performance”, according to MarketForces Africa research. READ: Bonds Yields Dip as CBN Rate on 364-Day T-Bills Rises

At the investors’ window, Cordros Capital said in its market report that total turnover increased by 5.4% from the beginning of the week to $367.63 million on Thursday, with trades consummated within the N414.00 – 452.17 band. 

Meanwhile, Afrinvest said in its market report that total turnover improved 15.2% to $433.7 million week on week.  In the forwards market, the rate was flat at N435.85 for a 1-month contract but appreciated 0.1% to N440.08 for a 3-month contract.

Also, 1-year contract gained +0.1% to N475.74 per the United States dollar.  The rate depreciated 0.1% to N452.42 for a 6-month contract. Parallel market rates worsened further, albeit, marginally.  In the segment, the exchange rate worsened to N709 from N708 in the previous week.

In the interbank foreign exchange market, it was a mixed bag as the FX rate closed flat at N430.00 from last week. Cowry Asset said the financial system got further bolstered by CBN’s FX retail refund where the sum of N150 million got injected into the market.

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 business and personal travelling allowance.

#Naira Reclaims Value Slightly, External Reserves Dip Further#

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