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The risk of buying Forex at black market rate of N460/$1 

Between 2012 and 2017 the naira has depreciated by 30% compounded annually.

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If you ask anyone today to choose between being paid in dollars or in naira, there will only be one winner. Since the oil price crash in early March and the ravaging COVID-19 virus, the exchange rate between the naira and dollar has depreciated across the multiple official and unofficial markets where the currency can be purchased. 

At the black market, the exchange rate sells for an average N460/$1 (as at this week) and is projected to go higher depending on who you speak to. At the NAFEX market where forex is sold by exporters and investors, the exchange rate is closer to N388/$1 oscillating between a plus or minus N2 band. Just last week the CBN informed the market that the SMIS window where forex is sold to importers and traders that the new floor for forex purchase in N380/$1. The exchange rate at the official CBN window remains N360/$1.  

READ ALSO: Investors lose N162 billion amidst buying pressure from ZENITH, GTBANK 

This buttresses the growing calls for the unification of the various exchange rate windows. The market wants a single uniform rate. It is easy to see why. No one wants to be on the losing side if a repeat of 2017 occurs. In case you forgot, the exchange rate was highly volatile in the parallel market trading for as high as N505/$1 before crashing down to N366/$1 after the CBN introduced the NAFEX window. Many people lost money as the naira converged towards that rate. You don’t be in this boat if history repeats itself.  

This is why speculating the exchange rate between the naira and dollar can be a brutally risky exercise compounded by the multiple exchange windows in the country. Buy at N460/$1 today and hold as most non-savvy speculators often do and the multiple forex windows are collapsed into one at N388/$1, as the central bank governor alludes to, things could get very risky. If unifying the exchange unlocks liquidity into the market rate and it holds at N388/$1, there is every likelihood that the parallel market rate will follow suit. Those on the other side of the trade looking to convert their dollars (purchased at N460/$1) into naira will be burned badly.  

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Perhaps a consolation is that so long as Nigeria continues to be import-dependent, it is only a matter of time before the naira depreciates to your buying price. Between 2012 and 2017, the naira has depreciated by 30% compounded annually. You probably only need to wait another 2-3 years and you claw back your losses. But the same cannot be said for anyone with a dollar investment and looking to convert to naira. The burn can be severe. 

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For example, you purchase $1,000 at N460 and invest in an asset that should earn you 10% or $100 in profits. If by the time you liquidate your $1,100 and the exchange rate has strengthened to say N400, your $1100 is now N440,000 compared to the N460,000 it cost you when you purchased at $1,000. The exchange rate loss has basically wiped out your profits and part of your capital.  

Speculating in forex is hugely rewarding but also very risky. Don’t be fooled to believe it only goes up, things can go down faster than you can imagine. The market will always deliver greater fools. 

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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.

4 Comments

4 Comments

  1. Sensible Investor

    July 7, 2020 at 9:35 pm

    It is only in Nigeria that once prices go up they never come down. So your last example doesnt add up as the parallel market will always be higher than the official rates. The best advice is to gradually stockpile in USD

    • Oluwatobi Akindunjoye

      July 8, 2020 at 1:14 pm

      Did you not see that in 2015 it rose to 500+ and then came back to 360? Was that not also in Nigeria. The article has concluded that while this could be a very rewarding speculative move, it’s also very risky.

  2. Stanley

    July 7, 2020 at 10:38 pm

    I agree with you on the naira depreciating further come a couple of years later due to our excessive reliance on imports. In fact I think the 5 year forward market price of the naira should be over N600/$, at the rate things are moving.

  3. 9jaRealist

    July 8, 2020 at 4:33 pm

    The question you should be asking is why people are COMPELLED to patronize the “black” market.

    PS: @STANLEY, 5-year forwards as of May was already N570/$1.

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Market Views

Bitcoin, Gold, leading Stocks tumble on strong U.S dollar

The U.S dollar index gained 0.6% on the day to settle at 90.77.

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Crypto, Investors flock to US dollar, Gold, Bitcoin, as Global Stocks record heavy sell-offs, Twitter Poll: Bitcoin price expected to reach $100,000 by 2021, cybercriminals, What it will take Bitcoin to hit $100,000?

The dollar was fired up at the last trading session of the week crushing its major currency rivals, Bitcoin, Gold, and leading global Stocks.

The U.S dollar retained its safe-haven status on the account of the U.S Dollar Index settled remarkably higher than a basket of six other global major currencies.

The U.S dollar index gained 0.6% on the day to settle at 90.77.

READ: U.S Central Bank leader says no rush into crypto dollar

What this means

Investors are piling to the U.S dollar after receiving worrying U.S economic data. Retail sales in the world’s largest economy were off 0.7% last month, the third straight drop.

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  • Such upsides seen in the greenback’s value saw gold at the expense of a charging dollar whose strength astonished metal traders, saw gold futures losing as much as 1.16% to settle at 1,829.90/ounce
  • Also at press time the flagship crypto asset, Bitcoin traded at $35,756.99 with a daily trading volume of $70 Billion.
  • Bitcoin is down 7.38% for the day.

READ: Google, Facebook, Twitter stocks drop, investors ponder if big techs have become too powerful

Also, the world’s biggest stock market by market volume and liquidity suffered heavy losses, as data showed the Dow Jones Industrial Average plunged by 0.57% to settle at 30,814.26 index points, the S&P 500 lost about 0.72% to settle at 3,768.25 and the Nasdaq Composite fell by 0.87% to close at 12,998.50 index points.

The greenback was an outlier at the last trading session despite drops seen in U.S bond yields associated with the benchmark 10-year U.S. note, whose resurgence in the previous week had been the catalyst for the U.S dollar comeback.

READ: Gold on a grand slam win, gains $40 per ounce

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What they are saying

Milan Cutkovic, Market Analyst at Axi, in an explanatory note to Nairametrics, spoke on fundamentals supporting the rebound of the U.S dollar;

  • “Many investors continue to stand on the side lines. President-elect Joe Biden unveiled his US$1.9 trillion stimulus plan. There were no major surprises, and a lot of it was already priced in.
  • “Investors are now focused on how quickly the Biden administration can implement their plans and support the ailing US economy. Although Biden will be inaugurated on Wednesday, the second impeachment of Donald Trump might overshadow the first few weeks of his term.
  • “Investors are also increasingly confronted with the reality that the pandemic is still far from being under control, despite the significant progress that was made in the past few months, and several COVID-19 vaccines already on the market.”

READ: Silver surpasses three-week high, joins Bullish momentum

Bottom line

Investors are increasingly confronted with the reality that the pandemic is still far from being under control, thereby flocking back to the safe-haven currency despite the significant progress that was made in the past few months, and several COVID-19 vaccines already on the market.

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Market Views

Google, Facebook, Twitter stocks drop, investors ponder if big techs have become too powerful

Some powerful politicians have publicly decried the role these tech brands are having in censoring speeches.

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Leading U.S tech stocks including Facebook, Apple, Twitter, Amazon, and Google experienced record sell-offs on growing global sentiments that big tech companies are getting out of control.

Such macros weighed heavily on these stocks as evidenced in Monday’s trading session performance for these tech stocks.

READ: Top 10 stockbroking firms traded stocks worth N1.17 trillion in 2020

At the end of Monday’s trading session,

  • Twitter lost about 6.41%
  • Facebook down by 4.01%
  • Apple dropped 2.32%
  • Google (Alphabet) fell by 2.31%
  • Amazon down by 2.15%

READ: Opera launches Opera For Business and announces new partnership with Google My Business

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Also, some powerful politicians publicly decried the role these tech brands are having on censoring speech, as senior lawmakers in France and Germany, including German Chancellor Angela Merkel, voiced their concerns.

The fall is largely attributed to record sell-offs from investors on account of these tech brands’ decision to permanently ban one of its most popular and powerful users, President Trump, and other leading voices from their social networks.

READ: 5 Nigerian startups selected to join 7 others at the Africa Tech Summit Connects (ATS)

What this means

Stock experts further anticipate such a move could deprive fast-rising tech brands of one of their best traffic-generators, as well as risking alienating some people who share the opinion that tech brands like Twitter, Google, Facebook have become too powerful.

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Milan Cutkovic, Market Analyst at Axi, in a note to Nairametrics, spoke on the prevailing macros disrupting U.S stocks at least for the near term.

READ: Africa’s internet economy has the potential to reach 5.2% of the continent’s GDP by 2025 – Goggle/IFC

  • “Fears of a global trade war have weighed multiple times on markets during the past few years. While concerns remain, the risk of trade tensions escalating has declined with Biden entering the White House soon.
  • “While the US-China relations will remain complex, they could warm up somewhat after four turbulent years. Meanwhile, tech giants, Facebook and Twitter, have found themselves in a political crossfire by blocking US President Trump from their platform, which also weighed on the NASDAQ index.”

READ: Banks Vs Fintechs – Who should be Afraid? (Part Two)

What to expect: The question of whether big tech has become too powerful is likely to lead to some heated discussions in the coming weeks.

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Market Views

Twitter drops 8.5% in early trading over President Trump ban

Record sell-offs from investors on account of the social media giant’s decision to ban, one of its most popular and powerful user, President Trump.

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US Elections: Twitter, Facebook suspend several news accounts

An American leading social media company, Twitter, saw its shares drop as much as 8.5% at the start of Monday’s trading session on the New York Stock Exchange.

READMike Pence to go against Trump, announces he will attend inauguration

The fall is largely attributed to record sell-offs from investors on account of the social media giant’s decision to ban one of its most popular and powerful users, President Trump, permanently from its social network.

READ: Co-founder of Floyd Mayweather-backed crypto sentenced to prison for fraud

Stock experts further anticipate such a move deprives the fast-rising tech brand of one of its best traffic-generators, as well as risking alienating some people who share the opinion that tech brands like Twitter, Google, Facebook have become too powerful.

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READ: Facebook suspends Donald Trump indefinitely

The tech brands are trying to stay away from accusations that they helped fuel the violence during the storming of the Capitol in Washington some days ago by a mob sympathetic to President’s Trump election loss.

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