Naira: FX Market Spooked as Court Overrides CBN Policy
Trading activities across Nigeria’s foreign exchange (FX) markets experience a rowdy trading session as the Supreme Court overrides the monetary authority decision to face out N200, N500 and N1000 noted in the country. The apex court decision casts doubt on the Central Bank of Nigeria’s (CBN) independence from political and other influences.
Consequently, the Nigerian naira depreciates amidst pressure in the investors’ and exporters’ foreign exchange market, according to rates movement in the official window. Nigeria’s FX reserve remained under pressure as gross reserve declined by about $42 million this week to $36.65 billion. In the investors and exporters window, the exchange rate printed at #461.75 to a United States dollar.
The naira also weakened at the parallel market as Supreme Court weighs into the naira redesign imbroglio. Trades were consummated within the N446.00 – N478.37 per United States dollar band, according to FX traders. In the forwards market, the naira rate increased across the 1-month contract, up 3.9% to N467.20.
Also, the 3-month forward contract gained 1.2% to N486.10, the 6-month forward contract appreciated 2.7% to N512.13 and the 1-year contract gained 5.3% to N543.35.
MarketForces Africa reported that the exchange rate movement has impacted some companies’ operations, recording large FX losses in the financial year 2022. By consensus, the naira is overvalued and weak macroeconomic conditions support a further valuation.
However, rather than for technical reasons, CBN has insisted on no devaluation while the market continues to punish the local currency exchange rates across the open and closed markets.
While the apex bank sticks to a decision not to devalue the naira, the local currency lost about 11% in 2022 and analysts are of the view that the CBN is merely postponing the inevitable. Irrespective of the critic’s positions, the CBN view has not changed except for a decision to allow the naira rates to weaken in the latter part of 2022 without funfair.
Bank of America estimated that the local currency is trading at 20% above fair value. In its 2023 outlook, Cardinalstone expects exchange rate to hit N500 at the official window, according to investment banking firm analysts’ note.
Citing data obtained from the FMDQ Exchange platform, investment banking analysts at Cordros Capital Limited told clients via email that total inflows into the Investors & Exporters Window increased by 10.7% to $937.60 million in February.
This signifies an improvement in FX positions when compared with $847.20 million supplied in the month of January 2023. Analysts attributed the increase to higher inflows from both the local, up 11.4% month on month to $816.90 million.
A breakdown shows that local contribution to the FX market accounted for 87.1% of total inflows. At the same time, foreign inflow jumped +5.9% month on month to $120.70 million, accounting for 12.9% of inflows. “Foreign inflows remain significantly below pre-pandemic levels”, according to investment banking analysts.
In 2019, monthly average was $1.56 billion. There are FX liquidity constraints in Nigeria with macroeconomic indices sending a flurry of negative signals about growth outlook. FX Inflows scarcity has also been noted to occur as the local currency remained overvalued.
“Over the short-to-medium term, we expect FX liquidity conditions to remain frail in the absence of reforms to attract US dollar inflows into the economy.
“The low FX liquidity conditions will also be driven by lingering global uncertainties and higher global interest rates, limiting foreign inflows to the economy. Thus, foreign investors will need some convincing actions as regards flexibility and clarity in the FX framework going forward”, Cordros Capital analysts stated.
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