Friday, November 30, 2018 / 10:18 AM / FDC
It is very unusual for the Naira to fall in the forex market in December. This is because it is a period when cocoa exporters get paid for the main crop harvest. Cocoa is trading at $2,145 per ton. Nigerian cocoa exports this year is estimated at 200,000 metric tons. This means that there is at least $429 million available to the Nigerian forex market.
In addition to cocoa, there is the seasonal inflow of dollars by visiting friends and relatives during the Christmas season. This is a major source of dollar flows for the BDCs. If we assume that this category of tourists control at least 5% of the Diaspora flows into Nigeria ($22bn), the aggregate supply of dollars for the period should be approximately $1.1bn. This is enough to keep the naira trading in the previous comfort zone of N360/$-N362/$.
A review of the forex rate trend in the last decade shows a consistent appreciation of the currency in late November and December. So the pertinent question is why is the Naira falling and what is it about 2018 that makes it different from other years?
2018 is the run-up to what is expected to be closely contested election in 2019. The political risk premium is relatively high and speculators are having a field day by going short on the naira and long on the U.S dollar. The recent increases in the U.S interest rates have made capital outflows more attractive than previous years. U.S interest rates have been at abnormally low levels in the last ten years, an era of quantitative easing and cheap money.
Coincidentally the impact of MTN effect on portfolio managers has increased the exit of the market. But interestingly, the sharp 30% fall in the price of crude oil has only served as throwing gasoline on the fire of speculators.
Our view is that the naira pressure is oversold. There is no valid reason for a 3%-4% fall in the naira in one week.
The price of oil may creep up above $60pb next week and the external reserves are climbing again after 8 weeks of depletion. Therefore, the jury is out as to where the naira is headed. The optimists hope to see it at N362/$, the pessimists and speculators are talking about N390/$. At this point, it is better to do nothing as the market searches for direction. Efficient market hypothesis tells us that prices (exchange rate) will always find dynamic equilibrium over time.