CBN steps in to correct FX market distortion

The Central Bank of Nigeria (CBN) sold dollars at the official and parallel markets last week in a bid to stem the panic-driven demand in the markets that has renewed pressure on the naira.

The apex bank sold some $70 million in the official market and about $16 million to Bureau De Change (BDC) operators.

The latest sale takes the CBN’s total
intervention in the official market this year to a total of $651 million while over $70 million has been sold to the BDCs since lifting a three-year ban on dollar sales to them this year.

The CBN’s latest sale did not seem to have much of an impact on the exchange rate in the official market but the parallel market rate rebounded over the weekend as traders reported a moderation in demand and improved supply.

Naira falls at NAFEM but rebounds in black market

Last week, the naira had its worst run since the devaluation in January, falling 7.8 percent to N1,339.23 on Friday from N1,234.49 at the beginning of the week, according to data by FMDQ Securities Exchange.

The naira appreciated to N1,280/$ Saturday, an 8.57 percent gain compared to N1,400/$ Friday, according to multiple traders who spoke with BusinessDay.

The naira has come unstuck in the past week after a month-long rally that helped the currency to the world’s best performer in April.

The renewed naira weakness comes on the heels of a coincidence of errors last week stemming from some headlines which sent the wrong sentiment around reserves, the misunderstanding of the governor’s speech at the World Bank/IMF spring meetings in Washington and market and operational arbitrage that led to banks being stuffed with USD cash at the official rate which was higher than the parallel market.

Cardoso had said at a briefing during the spring meetings that the CBN was not defending the naira with its external reserves. Data showing the CBN has contributed less than 4 percent to total turnover in the market proves the governor right.

There was however some misconception that Cardoso said the CBN will not intervene in the market to defend the naira.

In reality, Cardoso subtly admitted to interventions by the CBN in the market and implied that they will continue whenever necessary.

“Ultimately I perceive a future where the CBN will really not need to intervene except in very unusual circumstances.”

The out of context quote Cardoso made in Washington DC that CBN won’t defend the naira sent the wrong signal to the market and led to panic buying of dollars.

Rumor that banks were buying all available dollars caused by a loophole which allowed cash to be deposited and sold online to the bank also impacted the market.

This was exploited as official rates fell below price on the streets.

The spread between the official and black market rate was around N200/$ at its peak, leaving the door open to round tripping where dollars are obtained from the banks and sold on the streets.

The combination of these factors led to some spike in demand, further triggered by the wrong assumption that CBN, away in Washington and unable to react, won’t defend the naira.

The CBN last week asked banks for a two-way quote (the price at which banks were willing to buy and sell forex) in the hope to repel the rumour and clear the air that it won’t get involved in the market.

Some banks quoted as low as between $/NGN 1,100 and $/NGN1,150 diverging from the market rate of $1,400, which, as a banker mentioned, seemed as what is called an off-market quote.

The central bank then offered to buy at that rate & caused the banks to rethink and to revert to proper professional behaviour.

The CBN will be hoping its latest intervention will allay the fears in the market, curb speculative demand and return the naira on the path of stability.

Rising geo-political tensions and a stronger dollar are also piling pressure on the embattled naira.

The Israel-Hamas war for instance has sparked a risk-off sentiment among global investors who are increasingly pulling back from developing markets, draining Nigeria and others of much-needed dollar liquidity.

Investors are also pushing back their expectations of interest rate cuts around the world, as the US Federal Reserve’s battle with price pressures complicates other central banks’ loosening plans.

Expectations of a rate cut this year in the US and other developed markets had pushed yield-hungry investors to emerging markets including Nigeria but fears of a capital reversal are now swirling.