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The Nigerian naira experienced a decline of N7.65 at the Investors’ and Exporters’ foreign exchange (FX) window during the past week, despite two consecutive months of increased foreign currency inflows into the market.
However, the exchange rate in the open market worsened as demand surpassed supply. Many individuals turned to the parallel market to avoid the requirements set by banks for processing business and personal travel allowances.
Traders at the Investors’ and Exporters’ FX window exchanged the U.S. dollar for N776.90, compared to N769.25 in the previous week, due to prevailing pressures, despite improved inflows.
Last week, FX trades at the official window ranged from N600.00 to N820.00, as reported by data from the FMDQ Exchange analyzed by market analysts.
Data from the Central Bank of Nigeria (CBN) reveals that gross external reserves declined to $34.02 billion ahead of the maturity of Eurobond payments. This marks the seventh consecutive weekly outflow, with analysts estimating that the remaining reserves cover six months of imports.
This week, Nigeria’s senior unsecured $500 million bond, issued at a coupon rate of 6.375% to support government finance, will mature in the international debt capital market.
Although analysts do not anticipate immediate issues stemming from the repayment, the value of the Eurobond repayment in naira has increased following the decision to float the currency.
Due to fresh demand pressures in the parallel market, the naira lost N19.20 kobo, closing at N792.20 per U.S. dollar, compared to N773 in the previous week. Analysis of the Naira’s activities in the Forward Contracts Market this week shows that the local currency weakened across all forward contracts against the dollar.
The naira depreciated by 4.5% for a one-month contract, reaching N801.22. The three-month forward contract depreciated by 4.3% to N820.24 per U.S. dollar, the six-month forward contract lost 4.0% to N849.13, and the one-year contract depreciated by 3.5% to N910.26 per greenback.
As the foreign exchange market remains volatile in the near term, analysts expect the market rate to adjust in line with the forces of supply and demand, stabilizing against the U.S. dollar, barring any further market distortions.
Data from the FMDQ platform shows that total inflows into the Investors & Exporters Window (IEW) increased for the second consecutive month.
Foreign currency (FCY) inflows surged by 23.8% month-on-month to $1.41 billion in June, compared to $1.14 billion in May, according to analysts at Cordros Capital Limited.
Foreign inflows rose by 44.3% during the month to $298.8 million. However, these figures remain below pre-pandemic levels, with a monthly average of $1.56 billion in 2019.
Despite the Central Bank’s decision to devalue the local currency significantly, foreign investors remain cautious about returning in large numbers.
“We expect ongoing reforms in the FX market to improve foreign currency liquidity conditions in the medium term as market participants’ confidence grows. However, we anticipate that foreign investors will adopt a wait-and-see approach in the near term as they observe the CBN’s actions in clearing its FX backlogs and assess the direction of short-term interest rates amid high inflation,” Cordros Capital stated.
Non-deliverable currency forwards for the Nigerian naira sharply declined across the curve, reaching a new record low against the dollar on Friday, according to Refinitiv data. These forwards, used as a derivative product to hedge against future exchange rate movements, indicate that the market expects the naira’s exchange rate to reach N785 to the U.S. dollar in one month.
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