The naira weakened for a third straight day after hitting three-month highs, amid deteriorating domestic dollar liquidity after Nigeria’s foreign exchange reserves declined to a seven-year low.
The local unit dropped 5.3% against the dollar on Monday to halt a performance that had briefly elevated it to the best performing currency in the world, according to Lagos-based FMDQ. On the unofficial market, it fell 6% to extend the retreat of the past three trading days to 17%, said Abubakar Muhammed, chief executive of Forward Marketing Bureau de Change Ltd., which tracks the data in the commercial capital.
Traded volume at the foreign exchange market dropped to a two-month low of $86 million at the weekend before rising 27% to $110 million on Monday. But the supply proved insufficient, prompting the naira to soften while excess demand shifted to the unofficial market, he said.
The West African nation’s gross dollar reserves has fallen steadily for 17 days to $32 billion as of April 19, the lowest the reserves have been since Sept. 2017, according to Bloomberg’s calculations based on the latest available data from the Central Bank of Nigeria.
The trend has raised concerns that dollar inflows are not arriving quickly enough to rebuild reserves after the central bank settled overdue dollar obligations earlier this year.
“The naira has been supported by onshore dollar selling as long positions were unwound, but the rally was probably overextended,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank. “A dislocation started to emerge as domestic market participants sold dollars at increasingly lower spot levels” which was not sustainable and led to a correction, he said.
The currency has lost more than 60% of its value against the dollar following two devaluations since June to reform the foreign exchange market and attract more foreign capital. The central bank has also introduced a raft of measures to prod lenders to supply more dollars to the local market.
The steps have helped the naira to recover from a 1,627 per dollar low in early March to 1,234/dollar on Monday on the official market, which is the most recent day for which data are available.
The central bank on Tuesday offered dollars to operators of bureau de change at 1,021 naira, 17% below than the official rate tracked by FMDQ, in a bid to improve liquidity in the parallel market.
“If the central bank is driving appreciation by selling dollars to BDCs at a lower rate, then I’m not sure how sustainable that is,” said Banctrust Investment Bank’s analyst Ayodeji Dawodu, who predicts the naira will probably stabilize around 1,500 a dollar by year end, adding that this would spur strong foreign capital inflows.
Source: bloomberg.com