Yesterday, Monday I was informed that the naira was trading at N183 against the dollar. I compared that to last week when the naira at some point traded at N186 and felt good. I also recalled the CBN sold dollar at N165 N3 lower than its middle band of N168 and that made me even more happier. However, my attention was pointed to a seemingly odd anomaly by some respected analysts. The Interbank rate at closed at N184.1 which ironically was higher than the black market. That my friends is a huge anomaly of the financial markets.
What it means?
I asked to explain what this means and here is what I was told. The black market traders must be awash with so much dollars that they need not go to the bank or wait for the banks to sell dollars to them. The banks have for weeks been selling dollars to the streets and is it likely that at some point there will so much supply of dollars on the streets with less demand for it.
Why is this so?
Well, the theory is that some people may have been creating artificial scarcity via the banks which in turn had led to the further depreciation of the naira. They probably create a huge demand for forex which the CBN surely cannot meet thus driving the price of the dollar higher against the naira. The demand continues up to the interbank market with the spread between the official and bank rate widening further. This then forced the CBN to devalue the naira.  This is even more poignant when you consider thatis that about 30% or more of what the CBN sells in the Retail Dutch Auction (RDAS) goes to an “invincible” market that no one is really able to track efficiently. The demand could be hidden there and could be a ploy to create an arbitrage situation which ensures some people benefit from all the manipulations of the market. This is all a theory albeit a plausible one.
Who makes money out of this?
If this theory is correct then banks and other currency speculators should be making a killing out of all this. By creating artificial scarcity the spread between the RDAS rate and the black market rate continues to widen presenting opportunities for arbitrage. Imagine someone who bought dollars when the official rate was still abut N157 and holding on to it till the CBN eventually depreciated.
Now that the black market rate is cheaper, anyone can also buy dollars at the black market and then go to the bank to sell at a higher rate (which is another arbitrage) as well.
Will this continue?
Whether this anomaly will continue depends on the forces of demand and supply. If the black market traders remain awash with dollars on the streets then it is very likely that they will sell at lower prices. The banks as well at some point will have to force prices down, if demand for forex on their part reduces. The CBN sold at N168 yesterday meaning that even more forex is being pumped into the system. If the theory holds sway, then we are set to see the naira appreciate at some point during the week at the interbank.
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