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Currencies

ABCON President explains why there is forex crisis, lists sources of forex for BDCs 

Gwadebe said that the pandemic caused supply disruptions as the price of crude oil went down.

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Dollar to sell for N360, ABCON insists, ABCON President explains why there is forex crisis, lists sources of forex for BDCs 

The President of Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadebe, has given reasons why there is a liquidity crisis in the foreign exchange market while also stating the sources of forex supply to the Bureau De Change (BDC) operators.

The ABCON boss stated that some of the reasons include; low remittances from the International Money Transfer Service Operators (IMTSO), the shutdown of the entire BDC sub-sector window, the shutdown of airports which has affected foreign travellers who are a source of forex especially to BDCs, cancellation of autonomous transactions from the banks to the BDCs and so on.

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This was disclosed by Gwadebe, during a television interview with Channels Television.

According to Gwadebe, “Since the lockdown of the airports, the airports were shut down in March, and since then the entire BDC sub-sector window was shut down, because our sources include the International Money Transfer Service Operators (IMTSO) which is through the banks, then the travellers that are coming from abroad, the walk-in customers, the autonomous for 2, 3 years now, autonomous transactions that are coming from banks have been cancelled. So if you look at it all the sources are not there. So that’s why there is a liquidity crisis.”

Gwadebe said that the pandemic caused supply disruptions as the price of crude oil went down, even foreign exchange inflow from abroad also went down leading to the drying up of a lot of sources of foreign exchange. He said that once there is a liquidity crisis, there will be capital flight from foreign portfolio investors as they will move to convert their local assets to foreign assets which they regard as safer. He said a lot of speculators indulge in buying up a foreign exchange that they don’t need and keep in the bank. This he said puts a lot of pressure on the market.

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READ MORE: Forex liquidity up by 315% as Naira gains marginally at I&E Window

Going further he said, “Also don’t forget that there are a lot of loans, foreign-denominated loans by Nigerians, foreigners from Nigerian banks. What that means is that anytime there are variations in exchange rate, your portfolio must go down, so you have to act fast to get the necessary liquidity to put so you can service your debt.”

The ABCON boss lamented that the country’s import bill remains very high as a lot of foreign exchange is spent on food importation, petroleum products importation and even on medical supplies. He said that although the CBN resumed $100m weekly sales of foreign exchange for school fees, medical supplies and SMEs, it is still grossly inadequate as there is still pressure at the retail end of the market.

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While commending the CBN for the exchange rate unification plan, Gwadebe said you cannot have the same product with different rates especially when you know you have liquidity crisis, when there is a foreign inflow crisis. He said that investors are checking out, the crude oil sales are down, diaspora remittances are going to be affected by 20% according to IMF.

So the exchange rate unification will address the criticisms that have been trailing different exchange rates which gives rise to hoarding, rent-seeking and a lot of speculation. It will also increase the confidence of investors. 

 

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Patricia

Chike Olisah is a graduate of accountancy with over 15 years working experience in the financial service sector. He has worked in research and marketing departments of three top commercial banks. Chike is a senior member of the Nairametrics Editorial Team. You may contact him via his email- [email protected]

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Currencies

U.S dollar remains neutral as strong economic macros weaken its demand

The U.S. Dollar Index was slightly down at 0.02% to 97.040 at 1.30 pm Nigerian time.

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American Dollar remains king as stimulus fails to stop global financial market panic,Demand for “Inflow dollars” drive exchange rate to as high as $N420/$1 compared to “Cash dollars”, U.S dollar drops against major currencies, tension rises between America and China, U.S dollar gains against major currencies, America threatens China with sanctions., U.S dollar down against major currencies, more countries start lifting of COVID-19 induced lockdowns, The U.S. Dollar Index that tracks the American dollar dropped 0.14% to 96.5 as global Investors and traders appetite for risk increased in momentum, Digitization of U.S Dollar Faces U.S Senate Hearing, U.S dollar Remains Neutral as Strong Economic Macros Weaken its demand, U.S dollar Remains Neutral as Strong Economic Macros Weaken its demandU.S dollar Remains Neutral as Strong Economic Macros Weaken its demandU.S dollar Remains Neutral as Strong Economic Macros Weaken its demand

U.S dollar pulled back sessions high on Friday as Economic data released earlier showed the second-largest economy service sector printing impressive results, with the (Chinese) Caixin Services Purchasing Managers Index coming in at 58.4 in June, the highest reading in two months.

The U.S. Dollar Index that monitors the American dollar against a group of other major currencies was slightly down at 0.02% to 97.040 at 1.30 pm Nigerian time.

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Consequently about 24 hours ago the world largest economy recorded an addition of 4.8 million jobs in June and manufacturing activity printing a better economic result than expected, this further suggests that the economic stimulus by the U.S Fed Reserve seems to be working.

In addition, Currency analysts at ING, in a research note spoke about the U.S Federal Reserve stimulus package in relation to the strength of the dollar.

“Fed money printing has now secured what seems to be a stable negative correlation between risk assets and the dollar,”

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“As long as the Fed is still buying assets and prepared to do more, we expect this negative correlation, Risk On, Dollar Off, to dominate financial markets over the coming quarters. Economies slowly getting back on their feet should mean a backdrop of a benign dollar bear trend in the second half of the year.”

(READ MORE: U.S dollar stays flat as America’s Federal Reserve becomes “extraordinarily uncertain”)

Why this matters; The U.S. Dollar Index that tracks the American dollar against a basket of other major currencies (like the Japanese yen, British pound sterling, Swedish Krona, Euro), Individuals hoping to meet foreign exchange payment obligations, via dollar transactions to countries like Europe, and Japan, would need to pay more dollars in fulfilling such transactions

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Currencies

CBN adjust naira from N360 to N380 at SMIS

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Reports reaching Nairametrics indicates the CBN has instructed bidders at its Secondary Market Intervention Sales (SMIS) to increase their bidding price to N380/$1 floor. The SMIS is the market where importers bid for forex using Letters of Credit and Form M.

According to our sources, the central bank informed banks that they will only accept bids from N380/$1 and above and no longer N360/$1 meaning those who bid lower will not get any forex allocation. Transaction success in this market is based on bids with those who bid higher than the floor as they are often in an advantageous position to secure forex.

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This is essentially a huge attempt at unifying the naira and another adjustment of the exchange rate by the CBN. Recall the CBN Governor had informed investors that the bank will be unifying the exchange rate towards what is being traded at the NAFEX market where investors and exporters trade forex.

Nairametrics understands a circular has been sent to banks but we are yet to see it.

The SMIS window was created by CBN for importers to ease the pressure faced by businesses in the foreign exchange market through sales of foreign currency to authorized dealers (wholesale) or to end users through Authorized dealers. Businesses usually conduct their bid for forex at the SMIS window every two fortnight.

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Currently, rates are set at a floor of N360/$1 and a ceiling of N385/$1. Thus bidders are expected to bid within that range. The higher the bid the better your chances at getting forex. It is unclear if there were any buyers that bid above N360 as we gather most of the importers were not informed of the changes in prices until today.

In February, the CBN has injected $218.41 million into the inter-bank retail Secondary Market Intervention Sales (SMIS). The dollar sold at the time meant for only agricultural and raw materials sectors, is in continuation of its intervention in the inter-bank foreign exchange market. In May, the central bank surprised the market by injecting estimated $90-$100million to the system.

 

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Currencies

Naira gains against the dollar across forex markets as liquidity hits record increase 

At the black market, the naira appreciated marginally by N1 to a dollar to close at N461 to a dollar.

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Central Bank Continues intervention in Forex market to stabilize Naira, Naira to depreciate slightly over $1.52 billion maturing contracts expires, Naira hits N388.84 to $1 at the currency spot market, Investors and Exporters (I&E) window, Naira weakens against the dollar by 1.14% amidst uncertainty, Naira gains against the dollar at I&E window, forex liquidity up by 242%  

Forex turnover at the Investor and Exporters (I&E) window had a rebound on Thursday, July 2, 2020, as it rose by 1876% day on day, a massive increase from what was recorded the previous day at the foreign exchange market. This is according to data from the FMDQOTC, an exchange where forex is traded by foreign investors and exporters.   

According to the data tracked by Nairametrics, forex turnover increasedfrom $10.37 million on Wednesday, July 1, 2020, to as high as $204.90million on Thursday, July 2, 2020, representing a massive 1876% increase on a day-to-day basis. This also represents a major departure from the low forex supply since January 2020, the last time the market hit a $200 million turnover mark. 

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Despite the volatility at the NAFEX market, the spike in volume of sales provided a trading boost reducing the demand pressure experienced in recent days.

READ ALSO: 3 Crypto exchanges control about 14.3% circulating BTC supply      

Exchange rate     

In related news, the exchange rate at the I&E appreciated on Thursday, closing at N386 to a dollar, compared to the N386.50 that was recorded on Wednesday, July 1, representing a 50 kobo gain. The opening indicative rate was N386.86to a dollar on Thursday. This represents a 22 kobo gain when compared to the N387.08opening rate recorded on Wednesday.   

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At the black market where forex is traded unofficially, the naira appreciated marginally by N1 to a dollar to close at N461 to a dollar on Thursday, as against the N462 to a dollar on Wednesday. The exchange rate at the beginning of the week was N460 to a dollar. By crossing N460, the exchange rate has broken a psychological ceiling going past N460 for the first time since 2017.   

Nigeria continues to maintain multiple exchange rates comprising the CBN official rate, the BDC rates, and the NAFEX (I&E window). Nairametrics reported last week that the government is mulling unifying the multiple exchange rates in a bid to increase the amount available for state governments to share.   

The forex scarcity and drop in revenue put pressure on the value of the naira despite CBN’s effort to maintain stability across the forex segments. The CBN is expected to continue with its intervention in the foreign exchange market to ensure market stability.  

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READ MORE: Dollar supply: What Nigerians expect from the CBN

According to a July 2020 report from Moody’s, the foreign currency funding gap for Nigerian banks is expected to rise to $5 billion due to the current low oil prices, volatile forex inflows and lower diaspora remittances amid the coronavirus pandemic. These challenges are threatening to renew the foreign currency liquidity pressures that hit Nigerian banks during the previous oil crisis in 2016-2017. 

The report also indicated that dollar shortages are expected to persist over the next 12-18 months if low oil prices continue thereby renewing the forex liquidity crisis that led to severe rationing of dollar and ban on importation of some items during the last oil price crash in 2015-2017. 

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Forex Liquidity Issues

Despite the improved turnover recorded on Thursday, the volatility and uncertainty of the forex market still persist due to accumulated demand and liquidity shortages across markets.  The rise in demand and contrasting drop in supply has called for another round of devaluation, which the CBN has insisted it has plans to implement. A devaluation last occurred in March. The activities of the speculators seem to have continued unabated.   

Speculators have thus patronized the parallel market, widening the gap between it and the I&E window. The CBN maintains that the perceived demand cannot be substantiated as the lockdown induced by the COVID-19 pandemic suggest demand should be low due to travel restrictions and drop-in economic activities.   

The further decline in liquidity could further fuel speculations in the black market where the exchange rate has traded at a premium of N60+ over the last few weeks. The CBN claims most of the demand being cited is not represented by any official documentation and that it has informed foreign investors with genuine forex demand to be “patient” and that they will get their forex.  

 

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