Traders Nervous As Naira Tumbles 29% At N280\Dollar | Independent Newspapers Limited
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Traders Nervous As Naira Tumbles 29% At N280\Dollar

Posted: Jun 21, 2016 at 4:32 am   /   by   /   comments (0)

…Stock Market Sheds N163bn


Bamidele Ogunwusi

Lagos – Forex traders were nervous on Monday about the foreign exchange supply under the new forex regime just as the naira slumped 29 percent against the dollar after the central bank removed its currency peg to alleviate chronic foreign currency shortages choking growth in the country.

Governor of Central Bank of Nigeria (CBN), Godwin Emefiele, had said on June 15 when announcing the new regime that the monetary authority would intervene when necessary even though it was allowing the exchange rate to be “market-driven.”

The naira tumbled 29 percent to N280.5 against the dollar at 5:07p.m. in Lagos, but firmed up to N260 as the CBN was said to have intervened to help clear pent-up demand for foreign currency.

But traders are betting the naira will further depreciate more than 10 percent in three months, forward contracts show.

However, black market currency dealers were quoting the naira in a N325-N345 spread to the dollar, up to 10 percent stronger than on Friday on expectations that more forex liquidity on the interbank market would reduce demand on the street. The naira had traded just twice at N255 against the dollar, and less than $1 million had changed hands around midday, Thomson Reuters data showed, as dealers said they were nervous about foreign exchange liquidity under the new system.

The Nigerian bourse responded to the volatility when it went down by N163 billion or 1.63 percent after the positive trading of the previous three trading days.

The central bank started auctioning dollars on the spot and forwards markets around midday to try and clear a backlog of orders for hard currency, according to a person with knowledge of the transactions who asked not to be identified as the information isn’t public. While the size of the auction wasn’t disclosed, the backlog is around $3 billion to $4 billion, according to analysts at investment bank Chapel Hill Securities Ltd.

Forwards markets suggest the depreciation has much further to go. Three-month naira non-deliverable forward contracts rose 0.6 percent to N322 against the dollar, while one-year contracts climbed 0.9 percent to N357, heading for a record close.

There may be “higher volatility until the market becomes more functional,” Samir Gadio, head of Africa strategy at Standard Chartered Bank Ltd. in London, said. “Foreign investors will need to be convinced that the new foreign-exchange platform is sustainable before they resume the purchase of local assets.”

Olubunmi Asaolu, an analyst at Lagos-based FBN Quest said: “We see a lot of volatility from high dollar demand. While the naira could stabilize at about N290 per dollar, any move toward N350 will cause mayhem and prompt the central bank to moderate the drop by supplying additional greenbacks”.

“We never imagined a free-floating naira,” Yvonne Mhango, a Johannesburg-based analyst at Renaissance Capital Ltd., said. “This will release a pressure valve for the economy. We see the economy beginning to thaw and green shoots emerge possibly as soon as a year from now. Before then, we believe the macro picture will deteriorate.”

Demand for dollars, according to Tajudeen Ibrahim, head of equity research at Chapel Hill Denham Securities Ltd., won’t be satisfied today (Monday) alone and may take more than a week to clear.

He added: “This might also be a while before buyers from abroad feel confident enough to acquire Nigerian assets”.

Mathew Ogagavworia, a financial analyst, said what happened in the FX market was expected and that nobody should expect miracle to happen just like that.

“I can understand Nigerians’ high expectations on the new policy but things don’t just happen like that. We have to let the market take its due course. It is not a thing we have done before and I understand that the CBN itself has shifted the posts several times during trading today (Monday). My take is that things will improve as the market continues and more foreign investors are willing to bring money to the market”.

The CBN used capital controls to stem an outflow of dollars after the naira crashed to a then-record in February 2015, effectively fixing the currency at N197-N199 per dollar, as oil prices slumped. While stabilizing the naira, the controls deterred foreign investors and starved manufacturers of foreign currency needed to pay for raw materials and equipment. Nigeria’s gross domestic product contracted in the three months through March for the first time since 2004 and inflation accelerated to an almost six-year high of 15.6 percent in May.

Few trades went through in the hour or so after the market opened, making it hard to tell what the naira’s fair value is, according to Craig Thompson of Nyon, Switzerland-based brokerage Continental Capital Partners SA. The central bank seems to want to stabilize the currency at around N250-N260 per dollar and most local banks will be nervous about pushing through trades much weaker than that, he said.

“It will move to N300 at some stage,” Thompson said by phone. “There’s all that pent-up demand. But you don’t want to be seen by the central bank to be pushing it lower. It won’t sit well. There’s a bit of moral suasion to keep it here. But as the client orders come through, the banks will have to pay up to supply their clients.”