The Nigerian naira had a difficult week in the foreign exchange (FX) markets, losing substantial value versus the dominating US dollar and other foreign currencies. Rising demand pressure returned this week with weaker FX supply as a result of a halt in central bank intervention and foreign oil corporations’ FX sales, causing currency rates to rise.
Inflows into external reserves have remained modest after the devaluation. This is in contrast to market expectations that foreign currency market reforms would increase gross external reserves. The official exchange rate had surpassed N803 after more than 40% depreciation before it began to recoup its lost worth.
According to Central Bank data, Nigeria’s foreign exchange reserves continued to fall last week, falling by USD66.24 million to close at USD33.74 billion. This equated to six months of import insurance for an economy that is heavily reliant on imported commodities to thrive.
According to data from the FMDQ OTC FX market, the naira fell 4.8% to N778.42 per US dollar at the Investors and Exporters window (IEW). Cordros Capital reported a 44.5% decline in total turnover from the start of the week to USD344.09 million on Thursday.
Analysts noticed that most transactions were completed during the week within the N700.00 – N799.91 range. In the forward market, naira rates fell by 0.1% during the one-month period 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.
