Naira depreciates at parallel market as forex liquidity declines

November 5, 2020
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The Naira depreciated against the dollar, closing at N464/$1 at the parallel market on Wednesday, November 4, 2020, while it remained stable at the NAFEX window where it was sold for N386/$1.

The local currency had strengthened by about 7.8% within the one week in September at the black market, as the CBN introduced some measures targeted at exporters and importers, in order to try to boost the supply of dollars in the foreign exchange market, and reduce the high demand for forex by traders.

The CBN has sold over $500 million to BDCs since they resumed forex sales on Monday, September 7, 2020. This was expected to inject more liquidity to the retail end of the foreign exchange market and discourage hoarding and speculation.

However, the exchange rate against the dollar has remained volatile after the initial gains made, following the CBN’s resumption of sales of dollars to the BDCs.

The President of the Association of Bureau De Change Operators, Aminu Gwadebe, said he expects the impact of the extra liquidity in the market to be gradual.

Despite the drop in speculative buying of foreign exchange, the huge demand backlog by manufacturers and foreign investors still puts pressure and creates a volatile situation in the foreign exchange market.

The opening indicative rate was N386.05 to a dollar on Wednesday. This represents a 5 kobo drop when compared to the N386 that was recorded on Tuesday.

The N386 to a dollar is the highest rate during intraday trading before it closed at N386 to a dollar. It also sold for as low as N384/$1 during intraday trading.

According to data from FMDQ, forex turnover dropped from $231.35 million on Tuesday, November 4, 2020, to $231.56 million on Wednesday, November 4, 2020.

The sharp increase in dollar supply after the previous trading day’s drop reinforces the volatility of the foreign exchange market. The supply of dollars has been on a decline for months due to low oil prices and the absence of foreign capital inflow into the country.

As part of the measure to check forex abuse and illegal transactions, the CBN last month directed the freezing of accounts of about 38 companies.

The average daily forex sale for last week was about $169.93 million, which represents a huge increase from the $34.5 million that was recorded the previous week.

Total forex trading at the NAFEX window in the month of September was about $1.98 billion, compared to $843.97 million in August.

The exchange rate is still being affected by low oil prices, dollar scarcity, a backlog of forex demand, and a shaky economy that has been hit by the coronavirus pandemic.

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