At the parallel segment of Nigeria’s foreign exchange (FX) market, the Naira strengthened its position against the Dollar as FX dealers continued to digest the news of the Central Bank’s clamping down of speculators in the market.
At the parallel market, the dollar closed at N942/$ as against N945/$ on Monday, according to data by AbokiFX, an online platform that tracks the exchange rate on the parallel market.
The pressure on the naira in the parallel segment of the foreign exchange market started cooling since this week as the Central Bank of Nigeria (CBN) announced plans to boost dollar supply in coming weeks.
Financial Derivatives Company (FDC) analysts at the LBS Executive Breakfast Session for August who noted that exchange rate under the last administration was unrealistic and inefficient, added that volatility in the foreign exchange market in Nigeria is now at par with other currency markets.
The analysts said that Naira is undervalued by 6.26percent. While noting that their true value for the local current is estimated at N720/$, they said the Level of volatility in the foreign exchange rate market will reduce as the right policies are implemented.
In the short term, they believe that there should be stable supply of forex from the CBN and significant reduction in deficit monetisation and money supply saturation. For the medium to long term, FDC analyst see need for debt rescheduling for new money from multilateral agents -IMF; and fiscal and monetary policy coordination to build investor confidence and invisible flows.
Other factors they see that support exchange rate appreciation include increase in oil prices and oil production, reduction in global interest rates, and increase in invisible inflows as investor confidence improves.
“There has been high level of exchange rate volatility since the forex market reforms. IEFX rate traded within the band of N696.37/$ -N862/$ in July, closing rate averaged N776.07/$. Naira depreciated by 3.9percent to a low of N875/$
from N841/$ at the beginning of July, averaged N764.05/$; it was 8.13percent lower than the average of N764.05/$ in June,” they noted.
The CBN had said it does not believe that the current naira freefall is caused by the market forces. Rather it says it is caused by speculators.
Folashodun Shonubi, acting CBN governor, who noted this said that the government was ready to take action to save the naira.
Shonubi said: “The president is very concerned about some of the goings-on in the foreign exchange market. One of the things we discussed was what could be done to stabilise and what could be done to improve the liquidity in the market and also the goings-on in the various other markets including the parallel market,” he said.
In their August 15 note, analysts at Cordros Securities noted that “the CBN’s 2022 financial statement has now allowed us to analyse the country’s international FX liquidity position and net reserves using the IMF’s standardised methodology.
“The liquidity position has implications on the CBN’s ability to support the FX market comfortably and, by extension, the exchange rate,” they said, while adding that “the CBN’s FX liquidity position suggests FX pressure may remain intact”.
At the stock market, investors continued to stay on the sell-side of the Bourse as the market dipped by 0.17 percent. Investors sold mostly consumer good and oil & gas stocks which fuelled further movement southwards.
“Last week was a stormy one for Nigeria’s financial markets, with extreme weakness in the parallel exchange rate of the Naira, the publication of the CBN’s audited accounts for the first time in several years (accompanied by reports of collateralised lending against the nation’s reserves), a correction in FGN Eurobonds and the reintroduction of the Open Market Operation (OMO) auction by the CBN.
“Is it all bad news? Good mariners reset their bearings during storms, and we sense that things are changing for the better,” said the Guy Czartoryski-led team of research analysts at Lagos-based Coronation Asset Management in their August 14 note.
They noted that for several weeks “we have been describing how we await definitive guidance on the direction of Naira market interest rates, notably Treasury bill rates,” adding that “the reforms of the new administration of President Bola Ahmed Tinubu earlier gave us clear guidance on fuel subsidy removal (which made us bullish on FGN Eurobonds) and FX liberalisation (which made us bullish on bank stocks) but until last week we knew little about its approach to market interest rates”.