Naira trends lower amid OPEC+ supply cut announcement

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BY BAMIDELE FAMOOFO

Uba Group

The Naira depreciated by 0.44 percent (N2.14) week-on-week to N439.17/USD from N437.03/USD at the I&E FX Window during the trading week ended October 7, 2022.

It is an indication that the local currency may be moving gradually to another record low of N440/USD this week.

The trend also points to the need to hedge against naira depreciation following the recent interest rate hike by the Central Bank of Nigeria, and also Nigeria’s low crude oil earnings.

At the parallel market, the Naira closed flat at N740/USD w/w due to relatively calm in demand pressure.

“As we draw closer to the election year and with the campaign activities by political parties taking full gear already, it is expected that the demand for the greenback will buoy further weakening of the legal tender. Thus, as we witnessed, market participants maintained bids between N435/USD and N450/USD at the I&E Market,” Victor Ofili, Head of Research, Cowry Asset Management Limited noted in a report.

Meanwhile, at the Interbank Foreign Exchange Forward Contracts market, the spot exchange rate traded quietly as it closed the week at N430/USD from last week’s close.

In the meantime, analysis by experts at Cowry Asset of the Naira/USD exchange rate in the Naira FX Forward Contracts Markets appreciated across all tenor contracts except for the two months tenor which cleared higher by 1.09 percent week on week to N452.93/USD.

On the other hand, we saw the 1 month, 3 months, 6 and 12 months forward contracts closing the week stronger from last week’s close. Resultantly, the rates rose 0.19 percent, 0.25 percent, 0.18 percent, and 0.71 percent respectively to close the week at N445.94/USD, N452.02/USD, N467.08/USD, and N491.70/USD in that order. Elsewhere, the Bonny light crude price appreciated by $5.43 (0.60%) w/w to close the week at USD95.63 per barrel from USD90.2 per barrel in the previous week on the back of the decision from OPEC+ to cut global supply by 2 million barrels from November. This week, it is expected that the Naira will trade relatively calmly across all segments of the FX market as the recent decision by OPEC+ gradually permeates the global oil market and tickles down on Nigeria’s reserves with a positive effect on the local currency.

Jolomi Odonghanro , Head, Research & Strategy, Cordros Research, hinted that although the CBN has enough liquidity to support the F.X. market over the short term, “we highlight that foreign inflows are paramount for sustained F.X. liquidity over the medium term. Considering the tepid accretion to the reserves given the (1) low crude oil production level and (2) elevated PMS under-recovery costs, FPIs that historically supported supply levels in the IEW will be needed to sustain F.X. liquidity levels in the medium to long-term. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.”

The naira depreciated by about 6% at the Investors and Exporters foreign exchange window in September 2022 as the market recorded higher demand for foreign currencies for imports.

“At the parallel market, the Naira closed flat at N740/USD w/w due to relatively calm in demand pressure”

Historical trading data from the FMDQ shows that from N415, the exchange rate at the investors and exporters window weakened near N437.50 amidst lower export receipts and unimpressive remittance from offshore.

At the same time, pre-election demand for dollars drove spot rates higher in the unrecognised currencies market. Data from the FMDQ Exchange platform showed that the Naira was exchanged at the investors’ window at N437.03 per the United States dollar while the local currency depreciated further in the black market.

Based on consensus, analysts still believe that the naira is overvalued while multiple quotes continue to create speculative opportunities – thus keeping foreign investors away from the Nigerian market.

In a bid to push for exchange rate stability, multilateral lender, International Monetary Fund, continues to advise the apex bank on the need to converge its multi-tiered exchange rates.

The CBN still hopes to continue to support the naira across the foreign exchange market, though the nation’s external reserves remain sufficient for the currency fight. However, the external reserve has been declining over the past four weeks as global prices of oil receded.

Fear of a global recession amid monetary policy tightening has dragged the average price of Brent crude oil lower by 7.5% month on month to $90 per barrel, Afrinvest said in a market report.

Trading below $90, the Brent crude price printed lower at $85.14 per barrel last week, while the West Texas Instrument settled at $79.70 per barrel amidst the expectation that the oil cartel will cut production volume after a persistent decline in global prices.

“CBN"

Market data shows that the price was the lowest since the war in Ukraine began. In September, Nigeria’s foreign reserves declined 1.8% to close at $38.3 billion Despite its FX market intervention and dollar inflow enhanced approach, the Naira has not fared well, depreciating across the market segments.

At the parallel market, rates opened at N703.00 and closed at N745.00, depreciating 1.8%. Similarly, at the Investors’ & Exporters’ FX Window, the Naira weakened 6.0% to N437.03, according to market data.

At the FMDQ Securities Exchange FX Futures Contract Market, the total value of open contracts rose 6.4% month on month to $4.1 billion, Afrinvest hints, added that it was buoyed by the 2,443.5% and 288.8% month-on-month jump in the contract values of Nigeria’s September and November 2023 instruments with additional subscriptions of $229.9 million and $136.4 million respectively.

In its projection, Afrinvest analysts anticipate extended pressure on the Naira across market segments as weak foreign investment flows and reduced accretion from crude oil sales, due to untamed large-scale oil theft; continue to weigh on CBN’s supply capacity.