Nine days after the Central Bank of Nigeria (CBN) abandoned its 16-month-old currency peg of the naira (NGN) to the dollar (USD), there is something not quite right with the new FX market.
Foreign investors are not buying the story just yet (by bringing in their funds) and it seems like a case of the more you look the less you see.The major problem is that the USD/NGN is not trading like it should after a long period of a tight overvalued peg, like the CBN had. USD/NGN volatility has not spiked and trading liquidity is very low, so what gives?
Trading in the Nigerian interbank foreign-exchange market is yet to pick up, partly because the CBN cleared a backlog of dollar demand by selling more than $4 billion in the spot and forward markets on the first day without the peg. However investors feel the true level of the naira has not been reached and are yet to come back. They suspect the CBN is not letting market forces determine the true FX rate.
This can be glanced from volumes traded.
Turnover averaged about $40 million a day last week. Less than three years ago; weekly volumes were as high as $1 billion, according to analysts at Standard Bank Group Ltd.Globally currency markets are known for their high levels of volatility and liquidity.One hopes the CBN is not trying to be a magician here.Making traders believe there is free market trading in the dollar/naira, while in reality it just moved the level up to N281 from N199 and is heavily managing it at the new level.
The implication of course is that a lack of liquidity means forex will continue to be rationed and sold to a few people. The retail end of the market is being starved of liquidity as no one seems to be selling except the CBN. Could it be that people believe the current price is not real? No one knows for sure but at Nairametrics we expected the Naira to at least trade ad a 5% discount to the back market rate when trading opened on Monday last week. We felt that will allow more suppliers into the market as the black market rates is still considered the real market price. This is not happening and so the trickle down effect is what we are seeing. People who need Forex remain on the queue till it trickles down to them. How long you are on that queue will depend on how much dollars is supplied to the interbank market.