Naira settles at N282/$ as CBN intervenes with $4.06bn

The Nigerian naira adjusted by 29 percent to N282 against the dollar in the interbank foreign exchange (FX) market yesterday as the Central bank of Nigeria (CBN) intervened massively to ease pent up demand for the greenback.

In a confidence building move, the CBN called for one-time bids to clear backlogs and stated that demand would either be filled via spot FX sales and forwards.

The CBN sold $4.02 billion in special secondary market intervention sales (SMIS) and $46.5 million on the interbank market at N281 to N285 to the U.S. dollar, on the first day of market trading after its currency peg was removed, Thomson Reuters data showed.

The SMIS auction aimed at clearing mounting backlog in demand for foreign exchange, consisted of $532 million in spot sales and $3.48 billion in forwards contracts.

A breakdown of the contracts showed $0.69 bn in 1 month, $1.22 billion in 2 months and $1.57 billion in 3 months forwards.

“Few trades went through in the interbank FX market before the CBN auction, but volumes picked up after the results were released in the late afternoon. The interbank rate closed at 282/283 post CBN auction results,” Samir Gadio, head of Africa strategy and FICC research at Standard Chartered Bank said.

About 21 banks participated in yesterday’s auction and interbank FX trading, sources tell BusinessDay.

Few trades went through in the hour after the market opened, making it hard to tell what the naira’s fair value is, according to Oluwatosin Ojo of Cardinal Stone Partners.

“The CBN action was a multiple price auction, as such there is no average rate,” Ojo said.

“If you bid dollars at lower than N280, you will not get your demand filled today. Same practice applies in the Treasury Bills market,” Ojo said.

The highest bid rate was N382/USD while the marginal rate was N280/USD according to Ojo.

The CBN auction was meant to clear some N1 trillion (or $5 billion at the old rate N199/$) of FX backlogs.

This has now shrunk to circa. $4 billion at yesterday’s marginal rate of N282/USD, meaning the CBN could effectively have cleared all backlogs with its spot and forwards interventions, BusinessDay calculations show.

“With the injection of $530 million by the Central Bank into the market, l think that there will be a level of confidence. Speculative activities will be removed once arrears are cleared up. We should see some level of stability in the market,” said Bismarck Rewane, CEO of economics consulting firm, Financial Derivative Company, by phone.

The exchange rate may not remain at N280 in the next five days, according to Kyari Bukar- Chairman, Nigeria Economic Summit Group (NESG).

“What this portends is that it could either take longer or shorter to clear the FX demand backlog. With the rates now looking better than the N199 initial rate, other players can sell dollars and this will boost the supply side. The best scenario will be for the naira to appreciate and if there’s no panic, it may trade around N260-265, but we will need to wait and see,” Bukar said.

Nigeria’s interbank overnight rate climbed to 15 percent on Monday from 2 percent, after the Central Bank debited the accounts of commercial lenders to cover hard-currency purchases, traders said.

The CBN used capital controls to stem an outflow of dollars after the naira crashed to a then-record in February 2015, effectively fixing the currency at N197-N199 per dollar, as oil prices slumped.

While stabilising the naira, the controls deterred foreign investors and starved manufacturers of foreign currency needed to pay for raw materials and equipment.

Nigeria’s gross domestic product contracted in the three months through March for the first time since 2004 and inflation accelerated to an almost six-year high of 15.6 percent in May.

“Everything is settling down. It is very positive and encouraging. There is confidence in the market and liquidity is returning,” said Kunle Esun, analyst at Ecobank, by phone.

PATRICK ATUANYA, BALA AUGIE & LOLADE AKINMURELE