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Home Business News

The Forces That Brought The Naira Back From The Dead

Nairametrics by Nairametrics
February 24, 2016
in Business News, Currencies
The Forces That Brought The Naira Back From The Dead
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Something strange is happening to the naira and people are wondering why. From as high as N400 last Friday it has dropped to as low as N320. Flash back to just two weeks ago, it depreciated from N310 to N410. This volatility is unprecedented and only one thing can be the cause.

The exchange rate has been attacked by a set of speculators both on the buy and sell side. On the buy side are people front loading purchases for fear of a further ban or scarcity of the dollar. We also have others on the buy side who are looking to make some quick profits amidst the volatility. On the sell side were those who are clearly carrying out arbitrage by buying at the inter bank rate and then selling at the black market. We also had those who imported dollars into the country through multiple channels just to cash in on the official and parallel market disparity.

At some point last week media reports suggested foreigners from neighboring African countries had also come into the country with dollars and hoping to cash in on the huge arbitrage that existed across multiple currencies. Some also exploited gaps that exist between currencies by playing on the cross rates. The implication of all of this is a massive injection of supply of FX in the country. Speculators all converged loaded up with bullets and looking to kill the same target.

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What happened last week was also a major test for the concept of devaluation and floating the naira. Could it be that N400 is actually not the true value of the Naira? Is the true value N350? or N300? or N250? Did the market tell us exactly why the decision on what the value of the naira is should be left to them? Did it also tell us that even black market operators cannot thrive in a highly volatile market and will prefer a predictable stream of supply and demand even if it means them being regulated provided they are accommodated? Time will tell. But what we do know is that the naira has now crashed because the streets are flooded with dollars from those who were speculating and empty from those who have decided they weren’t having none of this again.

Don’t mistake this as an assertion that things are back to normal. Our external reserves is still low, oil prices are set to go even lower and we still have billions in pent-up demand waiting to be met by the CBN. Prices could still remain above N300 for weeks to come but the value of the naira for all the volatility this week surely is not N400!

Nairametrics

Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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