Money Market

Naira depreciates at NAFEX as market forex turnover falls to lowest in over 6 weeks

Naira depreciates at NAFEX as market forex turnover falls to lowest in over 6 weeks
Naira depreciates at NAFEX as market forex turnover falls to lowest in over 6 weeks.

The dollars changed for the naira as high as N389.50 during intraday trading at the I&E window as dollar shortages persist. This is according to information on the website of the FMDQOTC.

Total turnover for the week was $136.9 million, one of the lowest in weeks.

In contrast, the exchange rate at the parallel market was unchanged for the fourth consecutive day closing at N472/$1 on Friday, July 24, 2020.

NAFEX:  The Naira depreciated significantly against the dollar at the Investors and Exporters (I&E) window on Friday, closing at N389.50/$1. This represents a N1.50 drop when compared to the N388 rate close that was reported on Thursday, July 23.  The opening indicative rate was N388.21 to a dollar on Friday. This represents a 15 kobo gain when compared to the N388.36 to a dollar that was recorded on Thursday.

The naira fell to as high as N390.94 during intraday trading before strengthening to the closed rate of N389.50. It also sold for as low as N361/$1 during intraday trading. Forex is sold at several prices during the day. The lowest sale of N361/$1 is a surprise considering it is completely out of range with previous bids.

The 0.4% depreciation week on week (it was N388.5/$1 coming into the week) is perhaps attributed to the weaker forex turnover experienced.

Forex Turnover: Meanwhile, forex turnover at the Investor and Exporters (I&E) window recorded a huge improvement on Friday, July 24, 2020, as it rose by as much as 246.3% day on day. According to the data tracked by Nairametrics from FMDQ, forex turnover increased from $12.61 million on Thursday, July 23, 2020, to $43.67 million on Friday, July 24, 2020.

However, forex liquidity was short on supply at just $136.9 million for the week compared to $207 million sold a week earlier. This is also one of the lowest recorded since we started keeping daily records in June 2020. Average forex sale this week was $27 million compared to $47 million the week before. We also noted that on no day this week did we record a sale on or above $100 million, the first time this month.

Exchange rate disparity: The exchange rate disparity between the official NAFEX rate and black-market rate still remained wide on Friday staying as wide as N82.50. Nigeria maintains multiple exchange rates comprising the CBN official rate, the BDC rates, SMIS, and the NAFEX (I&E window).

Exchange rate unification remains on the cards and yet to be implemented weeks after the central bank governor confirmed it will be executed.

The minister of Finance also admitted that Nigeria was seeking a unification of its forex Windows, a move thought to be in line with the requirements from the World Bank. Nigeria is seeking a world bank loan of up to $3 billion. The country has been under pressure from the International Monetary Fund and the World Bank for currency reforms.

Parallel Market: At the black market where forex is traded unofficially, the Naira exchanged with the dollar for N472/$1 for the fourth day in a row on Friday closing at N472 to a dollar. The exchange rate opened at N470/$1 at the beginning of the week.

The stability in exchange rate contrast sharply with previous weeks that has seen the naira drop by N10, depreciating from N460/$1 to over N470/$1. Nigeria’s airspace remains closed to commercial international flight operations and won’t be open till October 2020. Foreign Travel has often been a source of demand for the greenback.

The recent demand for dollars at the parallel market is thought to be fueled by speculators. The parallel market also caters to forex trades through wire transfers especially for buyers who cannot fulfill their dollar demands at the I&E window or the SMIS window. Exchange rate for wired transfer is often at a premium to the black market rate.

Forex Challenges: The week has been one of the most challenging for the foreign exchange market as it witnessed very low liquidity. It continued its downward trend against the greenback and some other major currencies during the week as the central bank appears to have failed to intervene adequately.

Dollar shortages have plagued the country for some months after crash in oil prices, Nigeria’s major foreign exchange earner, thereby shifting demand to the black market.

In a bid to conserve foreign exchange, the Central Bank of Nigeria (CBN) directed banks to stop processing new trade documents for importation of maize.

Nigeria’s external reserves has fallen by just $200 million June to date. It fell from $36.57 billion as of June 3, 2020 to $35.996 billion as of July 23, 2020. The declining external reserve reduces the capacity of the CBN to intervene in the forex market, thereby putting more pressure on the naira.

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