The Central Bank of Nigeria has revised its one-year Non-Deliverable Forwards (NDF) for which it intends to settle foreign exchange futures contracts for the period ending February 2021 to N452.82 up from N440.86.
The NDF is a closely watched indicator of the direction of the exchange rate in the future and is often referenced against the spot rate of the exchange rate between the naira and the dollar.
Nairametrics gathers that foreign currency analysts are pointing at the latest NDF contracts as an indication that the closing rate of the exchange rate at the I&E window might be devalued this month. In the contract terminating February 24th, 2021 the central bank priced the dollar at N412.14 which, compared to the N395/$1 traded at the Investors and Exporters (I&E) window, represents a 4% devaluation.
Analysts who spoke to Nairametrics are of the opinion that the fact that the CBN is willing to settle NDF contracts due at the end of the month for N412.14 suggest the current CBN official exchange rate of N379/$1 could also be devalued soon, while the exchange rate at the I&E window could also weaken to N415/$1. The exchange rate between the dollar and naira at the end of the year 2020 was N410.25, a signal that the central bank was open to a weakened currency in 2021. So far, it has resisted a weakening.
The exchange rate between the naira and dollar closed at N395/$1 on Tuesday despite recording an intraday high of N416.95 according to data from the FMDQ. At the parallel market, the exchange rate closed at N480/$1.
The central bank has resisted the need to devalue the currency closer to the parallel market, citing the latter as a relatively smaller market that cannot be used to determine the true value of the naira relative to the dollar. Instead, it has introduced several foreign exchange policies aimed at curtailing excess demand for forex and improving liquidity.
For example, foreign remittances are now required to be paid in the currency in which they were remitted. Exporters are also mandated to inflow their proceeds to the I&E window or get kicked out of the banking sector. None of these moves are yet to close the disparity between the exchange rate and the black market and the official NAFEX market.
How the NDF works – The CBN enters into contracts with foreign investors who inflow foreign exchange into the country to hedge against devaluation risks. Using the example of a one-year NDF, a foreign investor brings in $1 million dollars into Nigeria and hopes to repatriate it one year from now.
He now enters into an NDF contract that allows him to convert the naira into dollar at an exchange rate of N452.82 when the time arises. If the exchange rate devalues beyond N452.82 to, say N460/$1, the CBN pays the foreign investor the difference of N7.18 multiplied by the $1 million. This protects the foreign investor against any future risk more than the N452.82 that he would have planned for.