Even as Nigeria’s central bank stepped in to limit the naira’s slump on the first day of trading without a peg, the market is signaling there’s plenty of room for more declines.
The naira tumbled 30 percent to a record 282.5 against the dollar by 7:33 p.m. in Lagos, the commercial capital, even after the central bank sold more than $4 billion to clear a backlog of demand for hard currency. The naira hovered near 260 in early trading, in a thin market, before the central bank asked local lenders to bid for dollars in a special auction around midday.
The Abuja-based regulator sold $4.02 billion in the auction, with $532 million sold on the spot market and $3.49 billion sold on the forwards market, Lagos-based foreign-exchange trading platform FMDQ OTC Securities Exchange said on its website. The central bank sold $700 million of one-month forwards, $1.2 billion of two-month forwards and $1.6 billion of three-month forwards, according to FMDQ. While the exchange rate for the forwards wasn’t disclosed, the dollars on the spot market were sold at a rate of 280 naira per dollar, according to person who asked not to be identified as it’s not public.
“Given the quantum that was cleared at this point, this will probably be viewed as a positive result,” Samir Gadio, head of Africa strategy at Standard Chartered Plc in London, said in an e-mailed response to questions. “That said, the pressure on FX reserves is only likely to be deferred in the forward market. The Central Bank of Nigeria will also remain the main provider of USD liquidity in the spot market for the time being.”
The central bank, which has seen its reserves fall to a more than 10-year low of $26.4 billion, will struggle to keep intervening on a large scale to defend the currency, according to UBS Wealth Management.
“They can’t do this for months,” said Jonas David, a Zurich-based emerging-markets analyst at UBS Wealth Management. “We could see further pressure on the naira” and it may depreciate to about 300 per dollar, he said.
Lagos-based investment bank Chapel Hill Denham Securities Ltd. had estimated that the backlog of demand was $3 billion to $4 billion.
Traders are betting the naira will further depreciate more than 10 percent in three months. Three-month naira non-deliverable forward contracts rose 1.6 percent to 325 against the dollar, a record on a closing basis, while one-year contracts climbed 1.4 percent to 359.
The naira was quoted at 254 when the interbank foreign-exchange market opened on Monday, ending the fix of 197-199 that the central bank had in place for almost 16 months.
Governor Godwin Emefiele said when he announced a float of the currency on June 15 that the monetary authority would intervene when necessary even though it was allowing the exchange rate to be “market-driven.”
The Central Bank of Nigeria introduced capital controls to stem an outflow of dollars after the naira crashed to a then-record of 206.32 in February 2015 as oil prices slumped. While stabilizing the naira, the controls deterred foreign investors and starved manufacturers of hard currency needed to pay for raw materials and equipment. Nigeria’s gross domestic product contracted in the three months through March for the first time since 2004 and inflation accelerated to an almost six-year high of 15.6 percent in May.
Few trades went through in the hour or so after the market opened on Monday, making it hard to tell what the naira’s fair value is, according to Craig Thompson of Nyon, Switzerland-based brokerage Continental Capital Partners SA. The central bank seemed to want to stabilize the currency at around 250-260 per dollar and most local banks were nervous about pushing through trades much weaker than that, he said.
“It will move to 300 at some stage,” Thompson said by phone. “There’s all that pent-up demand. But you don’t want to be seen by the central bank to be pushing it lower. It won’t sit well. There’s a bit of moral suasion. But as the client orders come through, the banks will have to pay up to supply their clients.”
Until the currency stabilizes, banks will be wary of selling dollars in case the exchange rate drops soon afterward and they make a loss, according to David Willacy, a trader at INTL FCStone Ltd.
“Everyone is incredibly nervous of selling dollars,” Willacy said by phone from London. “They’re worried about selling at the wrong rate. Everyone is waiting on the central bank to see what it will do next.”