Naira: Tinubu's Rates Convergence Talk Upsets FX Markets -Analysts

Naira: Tinubu’s Rates Convergence Talk Upsets FX Markets -Analysts

Traded at a historic low, the Nigerian naira lost N7.83 on each US dollar transaction conducted at the Investors and exporters window at a time when market players expect the foreign exchange (forex) convergence process to kickstart.

In the coming week, analysts expect the exchange rate to stay around N470 after it has crossed the new red line following a ‘vault’ of US dollar demand by corporates, importers, and invisible users.

A large number of economic experts across the sphere told MarketForces Africa that government or monetary authorities speaking about exchange rate issues in the public sphere always have unintended consequences.

Without an already mapped out modalities for implementation of FX reform, President Bola Tinubu told the nation in its inaugural speech about a plan to unify exchange rates – an issue that seems more sensitive to the market and speculators in particular.

Since Tinubu’s inaugural speech on May 29, the naira has been facing increasing pressures, with buckets of foreign currency requests across the market.  In the parallel or open market where the greenback is freely traded, the naira lost N18 or 2% to N770 from N752, according to channel check.

“FX rates convergence is solely responsibility of the monetary policy, and decision of rates should be within its power – not for president…”, LSintelligence Associates said in an email

Now, Broadstreet FX analysts are nervously rubbing their hands, noting that the naira has lost value sharply – lost about 2% against the dollar since May 2023 lows. Earlier in the year, MarketForces Africa reported that analysts estimated that the naira will be devalued.

Naira exchange rates in the range of N498 to N505 were estimated, based on major investment banking firms’ separate local currency projections for 2023.

“If currency rates and movements are an essential part of monetary policy, political leaders talking about them run the risk of upsetting markets”, MarketForces Africa gathered.

After Godwin Emefiele’s suspension, the market reacted negatively, but some currency traders told MarketForces Africa that the process for exchange might have started with the removal of the suspended Central Bank of Nigeria’s governor.

Data from the FMDQ Exchange platform showed that the naira depreciated to a historic low against the United States dollar at N472.50 at the Investors and Exporters FX window from N464.67 the previous week.

Nigeria is battling a scarcity of foreign currency, and analysts see more downside to fx accretion into external reserves than upside. The Organisation of Petroleum Exporting Countries and Allies (OPEC+) recently cut Nigeria’s quota below 1.4 million barrels per day to keep the price decline in check.

This will reduce the foreign currency earnings of the government, and could further impact external reserves. Consequently, analysts said the CBN’s ability to continue market intervention may be threatened as Nigeria’s FX reserves declined below $35 billion last week.

According to Cordros Capital Limited, total turnover at the window as of Thursday decreased by 21.4% from the week to date to $ 74.18 million. Analysts confirmed that trades were consummated within the N460.00 – N492.30/$ band.

In the forwards market, the naira appreciated by 0.5% across the 1-month to N480.18. It gained 0.9% on a 3-month contract to N506.77.  Also, the 6-month contract appreciated by 0.8% to N532.01 while the 1-year contract rose 0.8% to N561.12.

At the interbank foreign exchange market, the spot exchange rate cleared higher to close at N465, down 0.65% week on week from N462, according to Cowry Asset Limited analysts’ notes.

In the oil market, crude oil prices took a recourse on Friday for weekly loss despite efforts by Saudi Arabia to bolster oil prices in the market with the announcement for a further production cut and the forecast for tighter supply amidst economic concerns in the US, China, and Europe.

Brent closed the week at $75.92 per barrel. However, the Bonny Light crude price advanced with gains by 1.38% or ($1.03), to close at $75.68 per barrel from $74.65 per barrel in the previous week.

“We expect the naira to trade relatively around the N470 band across the official market segment barring any market distortion and current market information driving demand”, Cowry Asset said in its market brief.

Also, as the CBN continues its weekly FX market intervention to defend the value of the naira at the retail FX Auction and Secondary Windows, analysts anticipate movement in rates in tandem with market realities.

#Naira: Tinubu’s Rates Convergence Talk Upsets FX Markets -Analysts Naira Steadies as Banks Issue Update on FX Purchase