…depreciates by 11%
By Chinwendu Obienyi
Amid liquidity challenges which has continued to affect the FX market, the Naira continued its descent, depreciating by 10.5 per cent to close at N1,484.75/$1 at the Nigerian Autonomous Foreign Exchange Market (NAFEM) on Thursday.
This is coming after financial experts had suggested that the Central Bank of Nigeria (CBN) appears to be encouraging foreign portfolio investors (FPIs) to reinvest naira proceeds rather than purchasing dollars at the official market.
This development comes as the naira experienced significant appreciation on the official market, with the exchange rate reaching N1,339.33/$1 on Monday, and further strengthening to N1,173.88/$1 on Tuesday before falling to N1,329.65/$1 on Wednesday.
It continued its descent, falling by 11.6 per cent despite the apex bank’s increased dollar sales in anticipation of a $1.3 billion
non-deliverable forward (NDF) which matured on Wednesday.
According to analysts at Coronation Research, the depreciation of the local currency to
N1,484.75/$1 at the official market marks a significant shift from the theoretical fair value range of N740.2 to N852.7 per dollar.
They noted that this discrepancy highlights underlying issues in the market, emphasizing the importance of understanding the factors driving these rates.
“To begin with, the news is good. The bane of the currency market is to have a parallel market rate at odds with
the interbank rate (currently known as the NAFEM rate), a situation that results from pent-up demand for US
dollars which the official market cannot meet.
So, the fact that the NAFEM rate and the parallel rate have aligned (or traded very close to each other) since the beginning of February brings confidence.
We expect that confidence to be expressed by rising volumes in the NAFEM market, and indeed this took place during the early months of the year, exactly when the NAFEM and parallel rates merged”, they explained.
Whilst stating that the NAFEM’s initial increasing volumes and the strengthening of the Naira reflected market confidence, they noted that the drop in turnover since mid-April and the subsequent weakening of the Naira indicate liquidity challenges.
They said, “NDFs are settled in Naira for US dollar deals, with settlement in Naira at the prevailing spot rate. NDFs are entered into by financial investors and by trade investors (trade, letters of credit,
collections, invisibles, etc). It appears that there is an exceptionally large redemption, with a face value of
$1.3 billion, due this week.
This does not mean that the CBN is going to pay the Naira equivalent sum of $1.3bn this week: the CBN is
only due to pay the difference between the rate at which the contracts were made and the current spot rate.
Since we do not know the strike price of each contract, we do not know the sum of Naira which the CBN will
pay. And, indeed, for some trade contracts, struck as lower Naira/US$ exchange rates than the current rate, the
CBN may receive money”.
It appears that the CBN is looking to encourage foreign portfolio investors to reinvest their Naira
proceeds.
This would suggest that there is potential for significant US dollar demand this week.
They said, “Indeed, we would expect the CBN to be active in the foreign exchange market this week, supplying US dollars”.
