Divergent naira outlooks as CBN increases forex intervention to forestall depreciation

The foreign exchange market is enveloped with a cloud of uncertainty, with analysts offering divergent outlooks over direction of naira exchange rate this week, following last week’s sharp depreciation of the nation’s currency in the parallel market last week.

The naira last week suffered its  biggest depreciation this year as it lost N7 or 1.9 percent in the parallel market. According to naijabdcs.com, the live exchange rate platform of Association of Bureaux De Change Operators  of Nigeria (ABCON), the parallel market exchange rate rose to N369 per dollar last week Friday from N2 the previous week. The represents the third weekly depreciation of the naira in the parallel market, during which  it  lost N8.5 or  2.4 percent.

Analysts however attributed the sharp depreciation of the naira to different factors.

According to analysts at Lagos based Afrinvest Plc, the depreciation was due to increased demand for dollars for Personal/Business Travel Allowance (PTA/BTA).

Analysts at Lagos based Financial Derivatives Company  Limited however attributed the depreciation to speculation triggered by apprehension over the forthcoming general election, stressing  that there is no justification for such naira  depreciation  at this time of the year.

They stated: “A review of the forex rate trend in the last decade shows a consistent appreciation of the currency in late November and December. So the pertinent question is why is the naira falling and what is it about 2018 that makes it different from other years?

“2018 is the run-up to what is expected to be closely contested election in 2019. The political risk premium is relatively high and speculators are having a field day by going short on the naira and long on the U.S dollar.

“The recent increases in the U.S interest rates have made capital outflows more attractive than previous years. U.S interest rates have been at abnormally low levels in the last ten years, an era of quantitative easing and cheap money.

“Coincidentally the impact of MTN effect on portfolio managers has increased the exit of the market. But interestingly, the sharp 30 percent fall in the price of crude oil has only served as throwing gasoline on the fire of speculators.

“Our view is that the naira pressure is oversold. There is no valid reason for a  3.0 percent  to 4.0 fall in the naira in one week.”

CBN increases forex sales to BDCs

Meanwhile, in a bid to arrest the naira depreciation, the CBN on Friday introduced special intervention dollar sales of  $15,000 to each bureaux de change (BDCs) per week. This increases weekly dollar sales to each BDC to $75,000 from $60,000.

The CBN announced the intervention via a circular titled, “Introduction of special intervention of foreign exchange cash sales to bureau de change operators”.

The circular stated: “This is to inform Bureau De Change (BDC) operators and the general public that with the approach of the yuletide season and the resultant increase in the demand for Personal/Business Travel Allowance, the CBN has in addition to the existing market days (Monday, Wednesday and Friday) introduced a special intervention day every Thursday for $15,000  per BDC commencing on Thursday, December 06, 2018.

“All operators are hereby advised to ensure strict compliance with the provisions of the extant regulations on the disbursement of forex cash to their respective customers as any case of infraction will be appropriately sanctioned.”

Furthermore, the CBN increased its weekly dollar injection into the interbank foreign exchange market to $541.22 million while it also sold 51.86 million worth of the Chinese Renminbi (CNY).

On Tuesday the apex bank injected $210 million, with $100 million allocated to the wholesale segment, while $55 million was  allocated to the SME window and invisibles segment  each.

On Friday the CBN held a retail secondary market intervention sales (SMIS) during which it sold $331.22 million, while it also sold CNY51.86 million in the spot and short-tenored forwards segment.

Confirming the figures, the CBN’s Director, Corporate Communications Department, Mr. Isaac Okorafor, said that the $331.22 sold on Friday were for requests in the agricultural and raw materials sectors while the Yuan was for Renminbi denominated Letters of Credit.

As a result of the increased intervention coupled with 49 percent increase in market turnover in the Investors and Exporters (I&E) window,  the naira appreciated by 60 kobo  in the window as the indicative exchange rate for the I&E dropped to N364.1 per dollar last week from N364.7 per dollar last week.

Divergent outlook

However, in spite of the increased intervention by CBN, analysts outlook for naira exchange rate for this week was mixed.

While Afrinvest analysts expressed optimism that the CBN intervention will ensure stable exchange rate this week, analysts at Lagos based Cowry Asset Management Limited said the pressure on the naira in most market segment especially at the I&E, will persist this week  as foreign portfolio investors continue to demand for the dollar.

On their part, analysts at Financial Derivatives Company expressed  uncertainty outlook.

“The price of oil may creep up above $60 per barrel next week and the external reserves are climbing again after eight weeks of depletion. Therefore, the jury is out as to where the naira is headed. The optimists hope to see it at N362  per dollar, the pessimists and speculators are talking about N390 per dollar.  At this point, it is better to do nothing as the market searches for direction. Efficient market hypothesis tells us that prices (exchange rate) will always find dynamic equilibrium over time”, they said.