Forex speculators fear that a series of circulars issued by the central bank during the week could lead to a strengthening of the naira against the dollar. CBN said it will sell $ 10,000 per. Bureau De Change operator prior to the reopening of the airspace.
For most speculators who bought forex for less than N400 / $ 1 just before the first round of devaluation in March, they are considering whether to sell at the current price of N475 in time before the panic starts. This concern is reminiscent of 2017, when CBN announced the new investor and export window for forex trading at market-specific prices.
The move led to a strengthening of the naira from N500 / $ 1 to N360 / $ 1 and raised huge losses on speculators who opted for more depreciation.
Speculators are panicking
Nigeria’s exchange rate policy has meant that many business people have had to resort to crude ways to hedge against currency risk. When rumors of devaluation swirled in March, some quickly converted their naira into dollars, sending the parallel market rate over the official rate.
For Mike, a businessman who deals in luxury fashion, the fear is genuine and he is considering whether to sell now and book his profits or wait to see if the exchange rate will fall further. “I bought forex for less than N380 earlier this year, just before the black market interest rate started to fall. At N477 / $ 1, my margin gain is close to N90, so selling now means I remove my profits instead of letting it go. ” he explains that he prefers to go by his first name.
Another FX street trader, Musa, feared that the exchange rate could strengthen if the CBN is pumped into forex to the BDCs on Monday as expected. According to him “Buyers are running out of buying forex now because there seems to be panic selling at the moment. I lost some money between Friday and Saturday and would definitely avoid buying forex at the moment.
Predicting the course direction has become easy for some speculators. All they have to do is look at the price of oil, which is perfectly correlated with the direction of the course. Another important factor that many have come to learn is what decisions come out of plot 33, Abubakar Tafawa Balewa Way, central bank headquarters.
Last week, the leading bank issued a series of circulars culminating in an order warning that it will be tough for exporters guilty of non-repatriation of forex. It also required banks to submit the names, addresses and bank verification numbers (BVNs) of all exporters who have not returned their export earnings to their home country. Necessary ‘action’ would be taken against such defaulters, the CBN said in a statement.
A BDC operator Ismail from Ango Gold expressed concern about what could happen this week in this forex market if operators do not follow CBN’s instructions. “We are concerned about CBN’s recent warnings as sellers will be arrested if they get caught going on the price.”
Waiting for CBN
This week is likely to be a crucial moment for what can happen to the exchange rate. If central banks sell $ 10,000 to half of the nearly 3,000 registered BDCs, we could see revenue of $ 15 million in the first week. Add to that a daily average of $ 42 million in the Investor & Exporter (NAFEX) window, and we could finally start measuring what the true value of the naira against the dollar really is.
There is also the wired forex transfer market, which caters to people who trade in hundreds of thousands of dollars in a single transfer but bypass the official exchange rate market. The exchange rate in this market is typically sold at a premium to the official black market price traded in the streets of Lagos Island.
But even this market is threatened by the CBN’s hammer, with banks being asked to report BVN-linked accounts linked to export proceeds not declared on the official market. CBN also started third parties from accessing Form M, a document required to access forex to pay for imported goods.
These are all red flags for Mr. Peter Afolayan, a private investor trading stocks, commodities and other financial instruments with foreign currency holdings in the United Kingdom and Nigeria. He believes the announcement of the opening of the airspace to travel and the announcement of the sale of forex to BDCs is bad news for anyone holding the dollar. According to Mr. Afolayan, “I planned to sell my holdings last week, but will do so this week … I see prices crashing to N410-420 / $ 1 due to CBN’s recent circular”. But if you are long on the dollar and maybe use it as savings, I suggest you keep it ”
But not everyone is so optimistic about the strengthening of Naira. A recent report from Goldman Sachs, “A significant devaluation of the naira is likely to stabilize Nigeria’s external accounts within 12 to 18 months. An exchange rate of 500-550 pr. Dollar should create the desired balance…. compared to a current rate of approx. 407 ”.
Nigeria’s balance of payments, a tool used to determine the value of the local currency against the dollar, is in deficit, leading to speculation that the CBN is likely to need to be devalued once again in order to achieve the right balance.
The real test will happen this week and all eyes will be on two markets. The black market and the BDC market.
Analysts Contributors: Chike Olisa, Samuel Oyekanmi, Ugodre Obi-Chukwu.