Naira Settled Currency Futures Records Highest Daily Trading Volume in October


The daily trading volume of Nigeria Settled FX currency futures   has plunged over the past weeks as the original excitement that greeted its introduction appears to have waned.

An analysis of the open interest reports issued by the FMDQ indicates that the currency futures market   had momentum, going by the notable and hitherto increasing trading volume the market enjoyed from June 27th until a couple of weeks ago.

Volumes, enthusiasm wane

At introduction, the Naira settled currency market was instituted as a way to manage foreign currency risk exposure by Nigerians and Nigerian companies. As the market got underway, the trading volume peaked so much such that some analysts and observers began to wonder whether the market was being used to manage currency risk exposure or was it providing large investors with arbitrage opportunities. However, rather than bridge the gap between the official exchange rate and that of the parallel market as intended, the divergence between the two has been increasing instead.

Market participants traded over $1 b worth of currency futures in notional terms from June 27th to July 31 (excluding matured positions). In August alone, about $1,581.69 million worth of trades was recorded with daily transaction activity ranging from as little as $3.89m to as high as $340.63m, according to analysis by Quantitative Financial Analytics.

In comparison, currency futures trading volume fell dramatically in September as $785.15m notional was traded the entire month. Daily trading peaked on September 9, reaching $110.02m and $92.97 on 27th September.

quantitative-financial-analyticsfmdq

Source: Quantitative Financial Analytics/FMDQ

If the trading volume in September was poor, that of October has been dismal as the FX Futures market seems to have suffered excitement fatigue. So far in October, only $116.84 notional value has been traded with the daily transaction activity ranging from a low of $0.5m on 10/11/16 to a high of $19.57 (10/4/16). There was not a single trade on October 12th but the lull in the market seems to have eased as a whopping $43.07 million trading volume was recorded on October 18, the highest so far in October.

The reason for the declining interest could be because investors are beginning to see the market as one that does not have much to offer beyond their speculative value but for a currency like the Naira whose direction is easy to predict, there may not be much to speculate on. Again, the divergence between the official and parallel market rates makes it less attractive to contract to sell dollar via the futures market. Furthermore, the convergence of the NIFEX rate and the contract rates on the futures makes it more difficult to extract arbitrage opportunities from the futures contracts and therefore less attractive.

For analysts and market watchers wondering if there is a future for currency futures in Nigeria, it does look like the end is not near for the market as trading volume could peak at any time.

 

Credit: Quantitative Financial Analytics

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