RMB sees naira gaining as FX forwards pressure eases

Nigeria’s naira is expected to strengthen in the coming months as pressure from forward central bank foreign exchange contracts eases, after the market absorbs the equivalent of $1.3 billion last week.

That’s according to Rand Merchant Bank in Lagos, which estimates outstanding forward contracts will total just $198 million between now and December.

The naira slipped almost 10 percent last week despite higher dollar sales by the Central Bank of Nigeria (CBN). The naira traded at 1476 per dollar on Monday, according to data from FMDQ Securities Exchange. That’s stronger than the N1,484 per dollar it traded at last Friday.

The exchange rate volatility is a key concern for investors, according to RMB.

Liquidity in Nigeria’s foreign exchange market has dipped as the instability in the exchange rate and unrelenting inflation rate spooks foreign investors.

The CBN in May recorded its highest dollar sales in a single month in 2024, intervening in the foreign exchange market to boost supply.

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Some $575 million was offloaded by the apex bank in May to make up for thinner foreign investment inflows, according to data obtained from FMDQ Securities Exchange.

That’s more dollars sold than in the previous two months combined. The CBN had sold $151 million in April and $189 million in March, which gives a total of $340 million.

The CBN’s intervention in May, though exceeding previous months, accounted for only 6.6 percent of the $5.89 billion market turnover for the month of May (excluding the 31st).

“The CBN had to intervene in the market last week to prop the naira, given that dollar liquidity has been low,” a source familiar with the matter said.

“It had over $1 billion in Non-Deliverable Forwards and the lower exchange rate that happened after the CBN sold dollars equated to a lower payout for the bank (CBN),” the source said.

The Abuja-based bank sold dollars on three occasions last week with the single-day high in 2024 coming on Wednesday May 29, when it sold $141 million.

In the days leading up to that, the CBN sold $98 million and $126 million on Monday and Tuesday respectively.

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That makes a total of $365 million in three days and takes the total interventions, which on its own beats the total sales in the full months of March and April.

Another well-informed source told BusinessDay that the CBN also sold dollars in a bid to mop some naira liquidity.

“The CBN had futures maturities that meant liquidity injection of up to N1 trillion and with a tightening stance, they had just two means to mop up that liquidity- sell foreign exchange or sell OMO (Open Market Operations)- and they chose both,” the source said.

“The consequence of selling FX is an appreciation and because there has been dollar liquidity issues and the rates have been rising in recent weeks, selling dollars into a liquidity starved market is what the CBN should have done in any case. It just happens to double as a naira liquidity extraction mechanism,” the source said.