FX liquidity falls as lack of transparency threatens reform gains

Progress in the FX market appears inconsistent as market data for the week ending September 9, 2016 shows a major drop in trading activity between banks and clients.

Analysts say this inconsistency may be due to non-market driven price formation, which may be putting off potential foreign portfolio investors (FPIs).

The Spot FX market between the banks and their clients during the week to September 9th stood at $361mm, with an average daily turnover of $72 million, revealing a plummeting in turnover when compared with the previous week, where turnover was $1,160 million.

Turnover in the market among banks (Authorised Dealers), on the other hand, during the week, went back to the ‘normal’ levels post the recent FX market reform, as $81mm was traded in the same week, a huge drop from the previous week’s level of $242 million.

“Liquidity risk in the FX market appears to be a further deterrent to inflows from FPIs and Nigerian portfolio investors who may now participate in the Nigerian FX market, following the recently launched initiative by the Central Bank of Nigeria (CBN) to improve FX supply in the market through resident/non-resident Nigerian entities with foreign currency inflowed into the country,” a market participant told BusinessDay.

The data reveals that the market is still a far cry from its more buoyant levels of pre 2015, when the daily average turnover was at about $1bn.

Most analysts say the current unstable turnover levels in the market shows that there is still quite a way to go for the Nigerian FX market, and with that, opportunity for innovation and further prospects for development.

“It is unduly optimistic to expect international investors to be attracted to Nigeria until policy credibility and consistency are not only restored but also successfully maintained. Indeed, initial implementation of the supposed flexibility in exchange rate determination simply saw movement from a ‘hard’ peg at N197/$1 to a “soft” peg in the range N282-284/$. This, in my view, sent a needlessly negative signal from which we now appear to be belatedly back-tracking. The ‘market’ rates for the naira are in my view, an over-adjustment, given the fundamentals of the economy,” Doyin Salami an economist and member of the CBN, monetary policy committee (MPC) said in recently released minutes from the last meeting of the MPC.

The inter-bank FX market closed at $/₦308.69 for the week ending September 16, from a close of $/₦310.64 the preceding week. 

Sources tell BusinessDay that this appreciation of the Nigerian naira is labelled suspect by most corporate treasurers who believe the level of the nation’s currency should be a bit higher than they currently are.

Meanwhile, the market continues to struggle with achieving a consistent rhythm.

Full transparency in the FX market may be under threat from corporates who are yet to commence the use of the FMDQ Thomson Reuters FX Trading System for the execution of their FX transactions with Authorised Dealers, as desired by the CBN.