Clampdown on traders to lead to foreign exchange fragmentation

Foreign exchange market may witness further fragmentation following last week’s new policy of forcefully pegging the rate dollars are sold in the parallel market.

The security agencies last week clamped down on Bureau De Change and parallel market operators who sold dollar above N400 pegged rate by the Central Bank.

The development has increased speculative activities as the currency dealers have resorted to hoarding for fear of making losses.

However, after trading on Friday, naira appreciated by N10 at the parallel market closing at N450 per dollar. This represents 2.17 percent compared with N460 closed the previous day.

At the Bureau De Change segment of the foreign exchange market, naira weakened by N8 or 2 percent as it close at N408/$ as against N400/$ the previous day.

The local currency gained N1.61k against the dollar, closing at N304.75k on Friday, which is 0.53 percent gain from N306.36k traded on Thursday at the interbank spot market, data from FMDQ show.

At the interbank, the naira further weakened against the dollar on Monday with spot rate settling at N350.22/$ from N328.00/$ the previous Friday. Intraday spot rate touched a low of N375/$ before the apex bank intervened to moderate rate to N305.27/$ at the close of trade on Tuesday.

Interbank spot rate remained around Tuesday’s levels till the end of the week, closing the week at N304.75/$ on Friday. While interbank spot rate appreciated on some trading sessions during the week due to the CBN interventions, one year forward rate on the FMDQ OTC Platform depreciated on all trading days (from N321/$ on Monday to N355/$1.00 by Friday), implying bearish outlook on the local unit.

“In the interim, we expect recent developments to constrain supply at the BDC/parallel segments as operators withhold supplies. We imagine the possibility of this also leading to further fragmentation of the FX market, taking the parallel market further underground in view of the close scrutiny by security agencies. Thus, whilst parallel market rate could strengthen in the interim, the medium term outlook points to a more volatile currency,” analysts at Afrinvest Securities Limited said.

Money market rates operated within a tight band at the start of the week but rose significantly towards the end of the week on account of tight financial system liquidity. In the absence of substantial inflows, the Apex Bank also held fire on primary market activities during the week.

Accordingly, Open Buy Back (OBB) and Overnight (O/N) lending rates rose 12.2 and 13.3 percentage points W-o-W on Friday (from 13.0% and 13.5% last Friday).