Analysts predict outlook for naira as forex unification plans gain momentum

The exchange rate between the naira and dollar may move in the positive for Nigeria’s local currency, according to views of a cross section of traders and analysts interviewed by Nairametrics.

Last week, Nairametrics reported that the Central Bank of Nigeria (CBN) had increased the bid price for FX at its Secondary Market Intervention Sales (SMIS) window by 5.6% to trade at N380 to $1. This was in line with the apex bank’s plans to unify the exchange rate towards the NAFEX rate.

As traders mulled the implication of the latest move by the CBN, the naira depreciated against the dollar at the parallel market to trade at N461.00 to $1, while gaining against the US dollar to trade at N386 to $1 at the I&E window. However, the exchange rate could strengthen this week based on a positive set of assumptions.

A treasury dealer at Nigeria’s biggest bank by assets told Nairametrics about the Central Bank’s continual intervention in the currency spot market and outlook for the naira. He said:

“The CBN will sustain its interventions in various windows with injection of $100million to Invisibles and Small and Medium-scale Enterprises (SMEs) segment at ₦384 to a dollar. Also, the CBN will inject c.$250million through the Retail SMIS on Friday.

“With the increase in base rate at last week’s Retail Auction to $/₦380 from the $/₦365, I expect similar revision of the official rate from $/₦361 to IEFX level in line with rate unification exercise which would boost Naira revenue from crude oil sale and qualify the CBN to draw-down from the IMF/World bank loan.

“The paucity of funds that IEFX window has experienced since the start of the Q2 will persist this week. Though, I expect the CBN to come up with plans to clear the backlogs of FX demands estimated at c. $5bn for offshores investors just like it did in 2016. Nevertheless, I expect Naira to trade at sub $/₦400 levels throughout the week.

“With this move in unifying the exchange rate system, it is also expected that the present converging of the rates estimated at N387 to $1 (I &E Window) will boost revenues for the federal government which could see a gain of N20 on every US dollar earning in oil.”

Whilst the debate rages on about what the true value of the naira is, several factors are at play. The CBN Governor had alluded to the fact that the lull in business activities suggested that forex demand should be low, thus calling into question the pent-up demand being highlighted by several market analysts.

The Central Bank governor suggested that the black-market rates being reported were likely not representative of what the real demand was, but rather driven by speculative forces.

Michael Nwakalor, Macroeconomist at CardinalStone Research, in a phone chat interview with Nairametrics expressed optimism on the naira appreciating at the black market this week. He said:

“Amid purported pressure from multilateral organizations for a unified exchange rate, the naira has noticeably weakened at both the NAFEX and parallel markets in recent weeks, with reports of a devaluation at the SMIS window from N360/$ to N380/$.

“We expect a possible unification to converge towards the NAFEX rate of N385/$ and if supported by increased FX supply and clear body language by the CBN, we may also see a steep recovery in the parallel market towards that rate. In the absence of this, we expect a characteristically quiet week in the FX market.”

Conversely, market analysts believe that the reluctance of the CBN to fund liquidity shortages at the I&E window is the reason why the black market has depreciated to about N461/$1. They claim legitimate transactions have already taken place in the parallel market, especially for businesses that have obligations to meet but cannot access forex from official windows.

Thelma Ugonna Ohiri-Anyanwu, CFA, a leading financial expert in a Nigerian tier-1 bank, was also optimistic about the naira stabilizing this week. She said:

“With the CBN devaluing the currency by 5.3% from N360 to N380 at its latest currency auction, this saw the market close at about N389 to a dollar. This I believe is in a bid at unifying the rate at the various windows.

“In the coming week, with little or no significant activities to stimulate the market and no fundamental change, the naira will be relatively stable.

“The I&E window will likely trade around N388-389/$ levels. While the parallel market at N460 to 461/$ levels.”

CBN’s foreign reserves fell slightly during the week as FX outflows outpaced inflows. Data from Nigeria’s central bank showed that its foreign reserves stood at about $36.2billion.


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