…Offloads $876.26m at N1495 in retail auction
…Parallel market rate moves in opposite direction
The naira gained marginally in official trading on Wednesday following the sale of $876.26 million by the Central Bank of Nigeria (CBN) in a retail auction aimed at shoring up the ailing currency.
According to data from FMDQ, the naira strengthened to N1596 per US dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM) from N1601/$ the previous day.
The CBN, had in a circular Wednesday, disclosed that it sold a total of $876.26 million to end users whose bids were submitted by some 26 banks, at a rate of N1495 per dollar.
The amount sold is the single largest by the CBN under Governor Olayemi Cardoso who was appointed in October 2023.
“The sale provides a temporary breather for the naira,” one currency trader told BusinessDay.
“The market will however want to see a more defined pattern to the sales before we know what it means for the naira going forward,” the trader said.
Total bids at the retail auction came to US$1.18 billion which was received from 32 authorised dealer banks.
Of this, bids valued at US$876.26 million from 26 banks qualified, while bids valued at US$313.69 million from six banks were disqualified.
Read also: CBN sells $876.26m at N1,495 in retail auction
The disqualifications were due to four banks submitting bids after the 3:00PMcutoff time and two banks failing to provide bids in the required template. Additionally, all bids with Form Q and unverifiable Forms A and M on the Trade Portal were disqualified.
The CBN approved a cut-off rate of N1495/US$ for the Retail Dutch Auction.
The detailed results and qualified bids will be published on the CBN’s website to ensure transparency.
Settlement for the successful bids is scheduled for Thursday, August 8, 2024.
Omolara Omotunde Duke, director of the Financial Markets Department, affirmed the CBN’s commitment to boosting FX liquidity and promoting price discovery through this auction process.
The sale follows “growing unmet foreign exchange demand” which has “continued to increase the demand pressure in the foreign exchange market, with adverse impact on the exchange rate of the naira,” the Abuja-based Central Bank of Nigeria said in a circular to lenders last week.
The naira has come under pressure through seasonal demand from summer tourism as well as businesses seeking the greenback to bring in goods in the import-dependent nation.
The naira however weakened at the parallel market as demand swelled. The $313.69 million bids that were disqualified may have also found their way into the black market.
The local currency traded at N1,620 per dollar on Wednesday compared to N1,603/$1 traded on Tuesday at the parallel market also known as the black market.
Traders said on Wednesday that there was strong demand from individuals who want to travel abroad for the summer holidays.
Read also: Naira trades at N1,620/$ as market awaits CBN’s retail dollar sales
Auction seen sustaining naira
Investment analysts expect the Retail Dutch Auction to improve the naira value, bringing it to about N1,200/$ in the coming weeks.
“This move by the CBN will boost the naira against the dollar even in the parallel market,” Segun Sopitan, principal partner at Woodridge and Scott Consulting, told BusinessDay.
Sopitan stated that the value of total bids represents a surge as a result of the latent demand in the market mounting pressure on the naira.
“It’s not a surprise that the total bids were as high as $1.18 billion. If we return to a weekly Dutch auction system, it will continue because of existing latent demand in the market.
“However, if the CBN can meet that demand, eventually over one month or two months, the latent demand will be met and the demand that will follow will be based on ongoing transactions. The reduced demand will cause the naira rates to also come down,” he stated.
Sopitan further said that the sustainability of the measure depends on how the supply chains for the foreign exchange (FX) inflows are managed.
“The ability to sustain this will depend on how much forex inflows can be generated, and since the primary source of our forex is crude oil sales, the government will have to continue this trajectory of increasing our capacity in the coming weeks and months,” he said.
“We have been calling for a reintroduction of the Dutch system because we cannot leave our exchange rates to the forces of demand and supply in the market. No country that is serious about running its economy efficiently does that. So, this is a good development and we hope that they can sustain it.”
Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, earlier told BusinessDay that the “reintroducing the retail Dutch auction will support the naira and stem devaluation.”
He noted that although the CBN had been trying to reduce its activities in the FX market, the reality was that it would continue to be the main supplier of FX.
In a recent post on X, Opeyemi Folorunso, a financial data scientist, said that the Retail Dutch Auction system will ensure banks and other operators only bid based on the requests of their customers, putting an end to speculative demand.
