Exchange rate falls across the forex markets as CBN devalues the naira

Nigeria’s exchange rate at the NAFEX window depreciated to N386 during last intraday trading on Friday, August 7, 2020. In another development, the exchange rate at the parallel market dropped marginally on Friday as it closed at N475/$1 after exchanging as high as N486/$1.

Market Watch

Parallel Market: At the black market where forex is traded unofficially, the Naira depreciated against the dollar to close at N475/$1 on Friday, according to information from Abokifx, a prominent FX tracking website. This represents a N1 drop when compared to the N474 to a dollar that it exchanged on Thursday, August 6. However, in a deeper drop, Nairametrics forex tracker obtained a price as high as N486/$1 from some traders suggesting market volatility still persists.

NAFEX: The Naira depreciated against the dollar at the Investors and Exporters (I&E) window on Friday, closing at N386/$1.

• This represents a 50 kobo drop when compared to the N385.50 rate close that was reported on the last trading day, Thursday, August 6.
• The opening indicative rate was N385.55 to a dollar on Friday. This represents a N1.33 gain when compared to the N386.88 to a dollar that was recorded on Thursday.
• The Naira fell to as high as N390 during intraday trading before strengthening to the closed rate of N386. It also sold for as low as N359/$1 during intraday trading.

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Forex is sold at several prices and at different times during the day.

Forex Turnover: Meanwhile, forex turnover at the Investor and Exporters (I&E) window recorded a decline on Friday, August 7, 2020, as it dropped by 13.5% day on day.

• According to the data tracked by Nairametrics from FMDQ, forex turnover declined from $106.66 million on Thursday, August 6, 2020, to $92.22 million on Friday, August 7, 2020.
• The forex turnover for the day is the highest daily volume recorded in about 3 weeks. The dollar supply which had remained weak improved significantly during the day’s trading.
• The average forex sale for last week was a low volume of about $32 million which is a slight improvement on the $27 million that was recorded the previous week. FX turnover which topped the $100 million mark after weeks of very low volume, still falls short of the over $200 million turnover that was recorded in January.
• Total forex trading at the NAFEX window in the month of July was $937 million compared to $875 million in June.
• The exchange rate disparity between the official NAFEX rate and the black-market rate widened further on Thursday staying as wide as N88.5. Nigeria maintains multiple exchange rates comprising the CBN official rate, the BDC rates, SMIS, and the NAFEX (I&E window).

Exchange rate unification remains on the cards and yet to be implemented weeks after the central bank governor confirmed it will be executed.

COVID-19 Pressures

Nigeria’s airspace remains closed to commercial international flight operations and won’t be open till October 2020. Foreign travel has often been a source of demand for the greenback.

• The recent demand for dollars at the parallel market is thought to be fueled by speculators.
• The parallel market also caters to forex trades through wire transfers especially for buyers who cannot fulfil their dollar demands at the I&E window or the SMIS window.
• The exchange rate for wired transfer is often at a premium to the black market rate.

Forex Challenges: Last few weeks have been most challenging for the foreign exchange market as it witnessed very low liquidity. Although there was some improvement in dollar supply this week, the downward slide of the naira against the greenback and some other major currencies still persists due to tightened liquidity in the system.

• According to a report from FSDH research, forex inflows into the I&E window had dropped significantly in the second quarter of 2020 on the back of lower foreign portfolio inflows.
• Although there was a slight improvement in the month of July, the turnover of $937 million is a far cry from the $3.19 billion, $5.02 billion and $3.7 billion turnover that was recorded in the months of January, February and March respectively before the lockdown which was triggered by the coronavirus pandemic.
• The low oil prices have constrained the CBN’s capacity to intervene further in the foreign exchange market as dollar inflow still remains very low.

The exchange rate has faced significant pressure in both the NAFEX window and the black market. The pressure stemmed from declining external reserves and low oil price.

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Nairametrics had reported that in a move seen as a step towards the unification of the exchange rate, the Central Bank of Nigeria (CBN), devalued the official exchange rate to N380/$1 from N360/$1. The adjustment which was formally done on CBN’s website suggests the CBN may have moved to unify the exchange rate in line with the promise earlier made by the apex bank’s Governor, Godwin Emefiele.

This is the second devaluation of the official rate since the crash of oil prices and the outbreak of coronavirus pandemic. The first one occurred in March when the official rate was adjusted from N307/$1 to N361/$1.