The inability of the Nigerian naira to recover versus the US dollar alarmed the Central Bank of Nigeria (CBN) and prompted a new, untested approach, which a number of observers have praised as a move in the right direction.
The naira started the week on a sour note, losing almost 6% in the forex market as rising demand continues to outpace FX balance on the supply side.
Analysts reiterated in a series of discussions that the US dollar shortage remained the primary driver of currency rate volatility in the foreign exchange markets.
Market observers said the FX space was heated up in the just concluded week due to increased demand for foreign currency, while the supply side remains downbeat without clear-cut expectation of CBN intervention.
“The naira has to be protected; forget about price recovery without significant FX inflows that could reduce the excessive dryness in the currency markets.”.
The naira saw increased volatility at the Nigerian autonomous FX window, depreciating by 5.87% to ₦1,631.21, despite a $53 million intervention by the CBN.
“The Apex Bank FX interventions have not only been limited to having significant influence on exchange rate direction; they have also been intermittent with reduced efficiency for the purpose for which they are expected to be applied,” LSintelligence Associates said.
The naira has remained weak due to high demand for foreign currency to meet FX obligations and pay for imports by locals. Despite an increase in foreign reserves, exchange rates across FX markets have diminished how Nigerians feel about trading with the naira, the country’s sovereign emblem of authority.
Nigeria’s foreign exchange reserves increased by US$517 million week on week to USD38.58 billion, driven by consistent inflows.
Total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) fell 7.1% in September to USD2.17 billion, down from USD2.34 billion in August, according to the FMDQ platform data.
The decline was driven by a broad-based shortfall across local (which accounts for 84.1% of total transaction value) and foreign (which accounts for 15.9% of total transaction value) inflows, Cordros Capital Limited said in a commentary note.
The investment firm said inflows from local sources dipped by 6.0% in September to USD1.83 billion from USD1.94 billion in August. The slowdown was attributed to declines across the individual, non-bank corporate, and exporter segments, despite the more robust inflow from the CBN segment.
FX supply from individuals reduced by 53.1% in September, while contribution from non-bank corporates went down by 27.5%. Exporters’ flows dropped by 4.7% in the month, but there was a surge of 184.2% from the CBN segment.
Similarly, inflows from foreign sources declined by 12.4% to USD345.50 million in Sept. from USD394.50 million in August, partly due to weak investor confidence.
Over the short term, analysts said they expect FX liquidity conditions to remain weak, primarily due to limited intervention by the CBN. Analysts said this is likely to erode market confidence and intensify pressure on the naira.
“Whilst we note the improved liquidity from increased FPI inflows, we think the naira is likely to face continued pressure as FX demand remains elevated,” the firm said. In the forwards market, the FX rate for a one-month689.10, contract dipped by 0.3% to N1, 689.10 while a three-month forward contract fell by 0.7% to N1,770.68.
Currency traders said in a report that a six-month forward contract declined by 1.1% to N1,870.30 while a one-year contract depreciated by -2.1% to N2,095.43 per US dollar.
