FX market roars back to life with $1bn single-day trade

Turnover at Nigeria’s foreign exchange market jumped to the highest in a single day since 2017 on Tuesday, as a prolonged dollar shortage that has dampened economic activity for years gives way.

Some $1.085 billion was traded on the day, according to data from FMDQ Securities Exchange. That’s up 27 percent from $857.78 million traded last Thursday (the final trading day before a two-day Easter break) and is almost five times the average daily transactions in the market since the start of the year.

“Liquidity is definitely returning to the market and that’s solely down to the CBN’s reforms,” said Tajudeen Ibrahim, director, research and strategy at Lagos-based investment bank Chapel Hill Denham.

“The last time we had the kind of average daily FX trades that we recorded in the first quarter of this year was before COVID in 2019.”

“The CBN must now stay the course of the reforms,” he added.

The improved liquidity helped the naira extend its week-long winning streak, as the currency hit a three-month high of N1,278 per US dollar compared to N1,309 on Thursday.

Dollar inflows into Nigeria have surged since the Central Bank of Nigeria (CBN) lured foreign portfolio investors with higher interest rates on government debt and an undervalued naira. The moves were complemented by clearing a protracted foreign exchange forwards backlog that had drained confidence in past reforms.

“The payments of FX backlogs and improving carry trade opportunities are

piquing investors’ interest,” said Olaolu Boboye, lead economist at CardinalStone, an investment bank.

Nigeria is increasingly standing out for carry traders, who borrow where rates are low to invest where they are high. A good part of the dollar surge into Nigeria is being driven by them.

The country’s carry trade offers 21.8 percent using interest rate differential, placing it only behind Egypt (25.2 percent) and Ghana (24.2 percent) among peer African countries including South Africa, Zambia, Kenya, Mauritius, Uganda and Angola.

With returns of 16.1 percent, Nigeria however offers the highest return for carry trade among these countries when adjusted for expected movement in currency using 12-month Non-Deliverable Forwards. Egypt offers 11.9 percent while Ghana, which rounds up the top three list, offers 10.7 percent.

A Treasury Bills auction on March 27 saw bids submitted for the one-year paper spike to a historic-high of N2.48 trillion, 17 times more than the N142 billion that the government had intended to raise. Foreign investors are believed to have driven the surge like they did at an auction on March 13. The CBN said foreign investors accounted for over 75 percent of bids received at the auction.

The dollar inflows are improving liquidity and bringing much needed relief to businesses from manufacturers to retailers.

Monthly FX turnover, a measure of liquidity, has surged to a year-to-date average of $4.3 billion compared to $2.3 billion in 2023, as more foreign investors pile into a market once snubbed.

Cumulative foreign inflows since the beginning of the year were estimated by the CBN at $2.1 billion compared to $1.6 billion in the whole of 2023. That has led to an accretion in foreign exchange reserves which the CBN forecast will hit $35 billion by the end of this month.

Investors previously shunned Nigeria’s local debt as the central bank resisted a devaluation of the heavily managed naira. It became overvalued in the eyes of foreign traders, contributing to shortages of hard currency that caused inflation to soar.

Analysts say the CBN’s resumption of dollar sales to BDCs has also helped send out a strong signal of increased dollar flows into the coffers of the apex bank. That has provided some assurance for foreign investors who question the CBN’s level of dollar firepower.

An increase in diaspora remittances has also aided the upsurge in dollar inflows into Nigeria. The faded gap between the official and unofficial rates has killed the incentive for Nigerians in diaspora to send money through unofficial channels, helping bring liquidity to the official market.