NAIRA CERTIFIED UNSTABLE: RATE NOW N480 TO $1 – abokiFX

The naira is now certified unstable as the daily rate of depreciation since the 26th September 2016 has averaged 2%. The naira is expected to depreciate further for the rest of the week.

AbokiFX research team has observed through fundamentals and street research that this depreciation is driven by various factor as explained below:


Expatriates and Foreign Investors
Word on the street is that expatriates have lost confidence in the economy and are mopping up all the forex they can get in any of the three key currencies. The currency dealers are on standby to buy any volume supplied by a seller and are willing to buy at a premium. This explains the steady 2% average daily growth rate of the dollar this week. This trend is expected to continue till the end of the week and might spill over to next week if the desired volume is not met.

Street Observation
AbokiFX street agents have witnessed currency dealers at various currency hot spots in Lagos, absorb forex from customers, buying everything a customer brings in, still asking the customers for more. Some have resorted to a bidding war for forex especially the US dollar and the Euro.

 N350bn naira released
This has helped drive up demand for FX this week after the Finance Minister stated another N350bn will be released into the economy. The speculators have anticipated a demand for FX that would be needed for contracts by contractors and have decided to absorb the available FX in the market. There is also an active fx demand by contractors, whose contracts have been commissioned based on the N350bn disbursement.

Naira’s Rate of Depreciation
AbokiFX research team observed that the naira has depreciated at an average of 2% daily this week. Overall the naira has depreciated 13% against the dollar this month with most of the depreciation taking place in this week. Naira was N425 to $1 on1st September and is N480 to $1 on 29th September. The rate of Depreciation this month had been 0% up till the 20th September, meaning that naira had been stable till then. Once the N350bn was announced, the demand for FX exploded giving a daily depreciation of N10 to the dollar. The typical monthly rate of change in the naira to dollar is +/- 0.5%.

 Foreign reserve
The foreign reserve has lost 3.2% ($800m) in September alone weakening CBN’s capacity to defend the naira. This has heightened the lack of liquidity in the fx market, leaving banks struggling to hold on to what they have. The foreign reserve now stands at $24.6bn

Diaspora holding back
The regular remittance from diaspora is shrinking as those who send periodic remittances to Nigeria to invest have paused while they watch the naira depreciate daily in value. Many now want to see the naira settle before resuming the periodic remittances.

Investors Not coming
Global investors have ruled out further emerging market investments in Nigeria this year. The EU is struggling with the Brexit impact and the EU investors (UK included) have decided to pull back all their funding till the Brexit direction is clarified. They have indicated they will not be returning till 2017 when it is expected the Nigerian economy would have stabilized.

Manufacturers and Fuel Marketers
Demand for FX by both fuel importers and manufacturers has spiraled as their orders in the inter-bank markets are not fulfilled. They have permanently resorted to mopping up whatever they can get from the parallel market especially now that most families that went on holiday have returned with possibly some forex to exchange.

Fitch downgrade
This makes bond buying by overseas investors more difficult and puts pressure on the MPC to raise interest rates. This has increased investor risk which is factored in when considering buying Nigerian FGN bonds.

Inflation Spiraling
This eliminates any form of real interest rate as inflation now exceeds any form of investment return. Spiraling inflation also creates huge level of uncertainty making risk averse investors shy away from investing in the economy as return on investment becomes unpredictable. Inflation rate is 17.6% while MPR interest is 14%. This gives a real interest rate of -3.6% hence, not a productive investment upon maturity.

Banks will not sell to BDCs
Banks are trying to satisfy their customers before tending to any BDCs’ request for forex. This will continue until the banks believe they have an oversupply of forex which is not going to happen this year.

Conclusion
The aggressive depreciation of the naira this week is fuelled by internal demand and loss in confidence level in the naira.  AbokiFX believes the drive in naira depreciation will continue for the rest of the week and possibly spill over to early next week. This depreciation is not influenced by the strength of the dollar in the international markets rather, it is influenced by capital flight and panic in the market, making people convert their naira to any of the three foreign currencies to lock in value.