Nigeria’s naira extended declines for a third day of trading without a peg, even after the nation’s central bank said it was confident it had cleared a backlog of foreign-currency demand.
The naira fell 0.5 percent to 286 per dollar by 8:40 a.m. in Lagos, the commercial capital, after weakening 0.7 percent Tuesday. The central bank sold about $100 million in the interbank spot market Tuesday, according to spokesman Isaac Okorafor. That followed an auction of $4 billion on Monday — when the naira slumped 30 percent after the central bank abandoned its peg.
“It’s our estimate” that the bulk of the backlog of orders has been met, Okorafor said by phone from Abuja, the capital. “We’re very optimistic that liquidity in the FX market will improve. Whether we decide to intervene again depends on the dynamics.”
Stocks gained Tuesday, while yields on Nigeria’s Eurobonds fell to 10-month lows.
The central bank sold $532 million on the spot market and $3.49 billion on the forwards market on Monday, Lagos-based foreign-exchange trading platform FMDQ OTC Securities Exchange said on its website. 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 a person who asked not to be identified as the information isn’t 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 on June 20. “That said, the pressure on foreign-exchange reserves is only likely to be deferred in the forward market. The Central Bank of Nigeria will also remain the main provider of dollar liquidity in the spot market for the time being.”
Nigeria’s benchmark stock index climbed 2.3 percent to 29,442.71, its highest close since Oct. 29 and reversing Monday’s 1.6 percent decline. GlaxoSmithKline Consumer Nigeria Plc climbed 10 percent, while Champion Breweries Plc rose 9.2 percent. Yields on the West African country’s $500 million bond due in July 2023 were little changed at 7.09 percent by 8:21 a.m. on Wednesday.
The central bank, which has seen its reserves dwindle over the past several years, 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,” Jonas David, a Zurich-based emerging-markets analyst at UBS Wealth Management said Monday. “We could see further pressure on the naira” and it may depreciate to about 300 per dollar, he said.
Traders are betting the naira will further weaken by more than 10 percent by September. Three-month naira non-deliverable forward contracts fell 2.6 percent to 308.75 on Wednesday after a 2.5 percent slump Tuesday. One-year contracts dropped 2.8 percent to 343 after a 1.7 percent decline yesterday.
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 CBN 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.