Naira Tumbles Across FX Markets as External Reserves Dip
It was a tough week for the Nigerian naira across the foreign exchange (FX) markets as the local currency lost significant value against the dominant US dollar and other foreign currencies. Last week, exchange rates were spooked by rising demand pressure that resurfaced amidst lower FX supply at the instance of a slowdown in central bank intervention and international oil companies’ FX sales.
After the devaluation, inflows into external reserves remain unimpressive. This comes in contrast to the market expectation that gross external reserves would be strengthened due to foreign exchange market reforms. The exchange rate at the official window had crossed N803 after more than 40% devaluation before it started recovering its lost value.
Data from the Central Bank showed that Nigeria’s FX reserve maintained its downward trend last week, declining by USD66.24 million to close at USD33.74 billion. This translated to six months of import cover for the economy that depends largely on imported goods to survive.
Data from the FMDQ OTC FX market showed that the naira depreciated by 4.8% to N778.42 per US dollar at the Investors and Exporters window (IEW). Cordros Capital said total turnover decreased by 44.5% from the beginning of the week to USD344.09 million on Thursday.
Analysts noted that trades were consummated for most transactions during the week within the N700.00 – N799.91 band. In the forwards market, naira rates depreciated by 0.1% across the 1-month to N790.80
Also, forward contract rate for 3 months declined by 0.8% to N809.63; the 6-month contract forward rate slumped by 0.8% to N838.09 and then the forward contract rate for 1 year dropped to N897.57 contracts.
In the FX market, analysts noted that speculative activities have taken centre stage as the apex bank continues to show weak firepower to defend the local currency while market players anticipate the inflow of forex from the $3 billion emergency crude oil fund from the NNPC Limited.
“We think the recent NNPCL emergency crude repayment loan from the African Export-Import (AFREXIM) bank is favourable in providing near-term FX supply to support the FX market and stabilise the local currency”, Cordros Capital said.
At the close of the week, the naira depreciated by 5.26% and 7.65% against the US dollar respectively, with official and parallel market rates closing at N778.42 and N915/$1 respectively.
Weak demand pushed crude oil prices downward, and the market reported a weekly loss on the back of rapid Iranian crude exports The Brent Crude was up $84.40 per barrel on Friday and was followed by the WTI which traded at the $80 band per barrel.
Elsewhere, the price of the Nigerian Bonny Light crude oil closed positive on Friday at $88 per barrel on the back of tight global supply concerns and the Fed rate hikes expectation.
Cowry Research anticipate the naira would trade in a relatively calm band at the various forex markets barring any distortions while the apex bank maintains its interventions to shore up the naira value.
However, analysts said the market awaits the staggered inflow of fx from the $3bn emergency crude-oil repayment loan from AfreximBank into the market, we anticipate that demand pressure will persist across fx segments and cause further depreciation of the naira against the greenback.
“We acknowledge that the amount is not sufficient to significantly support the local currency, more so that the funds will come in tranches. Thus, if not adequately managed with other measures (such as higher interest rates and additional funding support from third parties or multilateral institutions), FX pressures may likely build up again, leading to another round of local currency depreciation”, Cordros Capital stated. Naira Steadies as Banks Issue Update on FX Purchase
