‘Forex trading in Nigeria rapidly gaining in popularity and an increased number of brokerages opening offices’

Jameel Ahmad is the chief market analyst at ForexTime Limited (FXTM), a company that provides access to global currency market and offers trading in forex, precious metals, share CFDs, ETF CFDs and CFDs on Commodity Futures. In this interview with PATRICK ATUANYA, BusinessDay analyst, Ahmad spoke on FX trading in Nigeria, potential returns, USD strength, and outlook for the naira. Excerpts.

What has been the level of demand for FX exchange/currency assets by local Nigerian investors?

Foreign exchange trading is one of the fastest growing financial markets in Nigeria, and we are seeing rapidly growing demand for FX trading services. The community of forex traders in Nigeria is currently around 400,000, and it continues to grow on a daily basis.

One of the advantages of trading FX is that it allows investment opportunities that are not reliant on the health of the local economy or the strengthening of a commodity, and we believe this is one of the reasons why interest in FX trading is growing in Nigeria. For those investors who may be growing disenchanted with the Nigerian economy, it provides them with an alternative and an opportunity to take control of their personal wealth.

Most asset classes have witnessed significant divestment following the volatility in oil prices. Investors will apparently be on the lookout for alternative investment classes or vehicles. Has there been heightened activity in the FX investment space?

The rapid drop in the price of oil has certainly heightened activity in the forex and commodities markets as investors have tried to take positions to benefit from such volatility. One of the advantages of trading forex and commodities is that you can benefit from the market, regardless of which direction it is moving. USD-paired trades are generally the most popular trades regardless of specific market influences, but this is particularly noticeable in the current environment with USD-strength really dominating trading strategies.

Do you see a trend where more local investors would want to hold more of their assets in foreign currency (dollars in particular)?

We are not in a position to analyse whether Nigerian investors want to hold more of their assets in a foreign currency, but as there are threats to devalue the naira it would not be surprising to learn that some investors may be looking for ways to protect the value of their wealth. One of the ways to do this is to hold a balanced multi-asset investment portfolio that would likely include holding a percentage of foreign assets, especially to hedge against country risk.

What are the levels of returns to be expected by a currency investor? How does this compare with return-on-investment from other classes such as stocks and bonds?

A significant difference between currency investors and investors in stocks and bonds is that the currency markets are usually more volatile, which could potentially allow a trader to profit from more opportunities. Although stocks and bonds are also subject to volatility, currencies are traditionally more fast moving.

Of course, any investment carries with it a degree of risk, so while a trader has the potential to make profit in currency trading, they also have the potential to suffer a loss. The extent of that profit or loss will depend on their trading choices, which is why it is crucial that investors new to forex must take the time to properly understand how the market works, which economic announcements can drive volatility in the market and learn how to interpret the technical trading graphs that help to provide indications of where the market is going. Trading via a demo platform is one of the best ways for investors to familiarize themselves with the forex market under live market conditions and – most importantly – demo accounts offer trading in a risk-free environment.

Given the fact that the short-term outlook for the Nigerian economy isn’t exactly great, and the equity and debt markets are still volatile and in a state of flux arising both from market activity of both local and foreign investors, would you recommend investing in currencies at this particular point in time?

The greatest advantage that forex trading can provide is that it is a global business and many prospective traders do trade outside of the currency, they live with on a day-to-day basis. Trading is not something to ever take lightly, with it requiring market knowledge, education and comprehension of the level and types of risks involved.

Read also: ICM Trader sees prospects in forex trading amid economic downturn  

Investing in currencies at this particular point in time does provide some advantages, simply due to the increased market volatility we have noticed as the divergence in both economic and monetary policy framework have emerged to investors, and as a result of central banks reacting to the drop in oil price. Although some novice traders may look at this as the most opportune time to enter a trading environment, it must also be pointed out that investing money should never be rushedand all the relevant risks should be evaluated, and although there is the potential to make profit, this is matched by a similar potential to make losses.

Would you say that the USD is overvalued now? What implications will this have for crude oil dollar earnings, and capital flows to emerging economies like Nigeria?

Many have been surprised by the USD rally over the past six months, but this has been led by a consistent continuation of improved economic performances from the United States and the awareness that the Federal Reserve are moving closer towards raising US interest rates. The Federal Reserve’s decision to conclude QE, increased demand for the USD because it was seen as a solid indication that confidence in the US economy was improving, while the anticipation that the Fed will raise interest rates in the next few months is furthering the demand. Bearing in mind that the Fed still haven’t raised rates and most likely won’t for the next few months, there remains potential for the USD to rise even higher yet.

Crude oil is priced in dollars, therefore a higher valued USD could add pressure on the price of oil. In regards to what implications this will have on crude-oil dollar earnings, it is going to take some more time for the price of oil to bottom out and for economic data to be released before we can judge the full implications. However, the Nigerian economy does have a reliance on its oil sector so the lower prices could be negative for the Nigerian economy.

Given the fact that the naira isn’t a tradable currency, would you say that the forex/currency market is largely detached from Nigeria’s real sector economy? Of what relevance is currency trading to real sector players?

The greatest advantage that forex trading provides to prospective traders is that it is a completely global business. This provides an opportunity for anyone with a given interest in the global economy, to learn what is happening to a particular currency/commodity and potentially become a trader with the right level of market knowledge and education. Due to forex trading in Nigeria rapidly gaining in popularity and an increased number of brokerages opening offices in Nigeria, I wouldn’t say it is detached from Nigeria’s real-sector economy.

What would a market analyst like yourself expect to happen within the naira space?

Bearing in mind the percentage of domestic growth contributed to the Nigerian economy through oil, the steps taken to devalue the Naira are understandable for some to see. However, it is still going to take some time before we begin to notice what the real implications of the substantial drop in oil prices are going to be for the Nigerian economy. In regards to what market analysts are looking for following the drop in oil, we are seeing increased market volatility due to several different central banks taking measures to devalue theireconomies. As central banks continue to react to the impact lower oil prices are having on their respective economies, we are looking at potential for high market volatility to continue.

Has there been significant Nigerian demand for currencies outside of the USD, say the Euro, the Yuan or the Yen?

Demand for the USD has reached multi-year highs following increased and continued improved performances from the US economy. As a result of these improved performances, the USD has continued to strengthen. With optimism rising that the Federal Reserve will raise US interest rates in the upcoming months, there is potential for USD demand to continue extending even further. On the other hand, the divergence in both economic sentiment and monetary framework between the US Federal Reserve and European Central Bank (ECB) is becoming very obvious to traders, and we have seen the EURUSD decline from 1.39 to 1.16 in around six months. This divergence in sentiment is likely to continue, so there is high potential for this decline to continue as well.

There is the myth that investing in currencies is more volatile than the average investor can manage. Is this usually the case?

It is true that any investment carries with it a degree of risk and it is critical that all investors understand this before getting involved. While the currency market is constantly moving, and there are periods of high volatility which increase exposure to the risks that exist, an educated and knowledgeable trader is able to recognise and navigate through these. I always recommend that investors new to forex take the time to properly understand how the market works, which economic announcements can drive volatility in the market and learn how to interpret the technical trading graphs that help to provide indications of where the market is going.

What outlook can you foresee for forex investment in the Nigerian space?

The forex market globally is growing on a daily basis with an increasing number of investors around the world recognising that in the changing financial and investment landscape, the forex market possesses many qualities that are preferable to that of traditional investment vehicles such as stocks and bonds.Nigeria is no exception and I would anticipate that it will continue to grow.