Recent FX Pressures: Storm Before the Calm?


Tuesday, August 24, 2021 / 10:50 AM / by United Capital Research / Header Image Credit: Bloomberg

Over the past week, renewed pressures have resurfaced in the parallel segment of the FX market with exchange rate closing at N520.00/$, from a pre-BDC FX ban low of N505.00/$. The sudden pressure at the parallel market coincides with a period of sustained decline in level of transactions at the Investors and Exporters (I&E) window. To give context, average turnover at the I&E window has declined by 12.0%, 1.7% and 21.3% w/w in each of the last three weeks, from $158.9bn to $107.9bn as at the week ended 20-Aug.

At the last Monetary Policy Committee (MPC) meeting, the CBN governor had announced the decision to halt the sale of FX to BDCs operators. In doing so, the governor assured the CBN would sustain FX sales to banks who will now become the new distribution channels for retail FX demand. This, helped to allay the knee-jerk reaction trailing the decision as exchange rate at the parallel market trended lower.

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However, in light of the recent pressures coinciding with sustained period of decline in I&E window transactions, we suspect reduced intervention at the I&E window may have moved demand to the limited parallel market, pushing exchange rate higher. In addition, our survey of anecdotal sources in the parallel market revealed there exists scarcity of forex in the parallel market as demand outweighs supply giving unmet demands in the NAFEX window.

Looking forward, we think the outlook for the naira is fairly uncertain. The current pressures may somewhat be considered "a storm before the calm", considering the government is close to issuing the first tranche of its planned $6.2bn Eurobond issuance.


In addition, the IMF has started the disbursement of the Special Drawing Rights (SDRs) which would see Nigeria get $3.4bn worth, even though we do not expect the CBN to drawdown immediately. Despite the positive factors, rising Covid-19 cases across the globe is gradually dampening sentiments on oil demand. This has led to sustained bearish pressure in the crude oil market, portending severe risks for FX inflows from crude oil.

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