Dollar pulls back on rising optimism

Data suggest increasing perception about naira

The dollar pulled back at the parallel market at the weekend on the strength of rising market optimism and ease of panic over the stoppage of foreign exchange sale to the bureau de change (BDC) operators.

The dollar traded between N505/$ and N515/$ in the Lagos market at the weekend. On Wednesday, a day after the announcement of the new policy by the Central Bank of Nigeria (CBN), the naira fell to N525/$ raising the fear that it would hit N550/$ in the next few weeks.

There will panic across the market after a meeting by the Body of Bank Chief Executive Officers (CEOs) where it projected that the exchange rate would recover to at least N423/$.

Deposit money banks (DMBs) also commenced aggressive marketing of the personal travel allowances (PTA) and business travel allowance (BTA) through personalised messages and other platforms at the weekend.

Following the suspension of funding to BDCs, the apex bank had directed banks to create mobile applications and alert systems to update customers of their foreign exchange movement.

“Further to the Monetary Policy Committees (MPC briefing of July 27, 2021, of Deposit Money Banks (DMBs are hereby reminded to set up teller points at designated branches across the country to fulfill legitimate FX requests for Personal Travel Allowance (PTA Business Travel Allowance (BTA), tuition fees, Medical payments, SMEs transactions, amongst others.

“In this regard, DMBs are also required to adequately publicise the locations of the designated branches and make necessary arrangements to sell FX to customers in cash and or electronically in compliance with extant regulations,” the Bank said via a circular issued on Wednesday.

It warned that no customer who satisfied the minimal requirements should be refused forex. The concerted efforts may have raised market optimism, leading to a decline in panic buying.

Some of the traders told The Guardian at the weekend that dollar requests had dropped significantly, starting from late hours of Friday.

At the Investors’ and exporters’ (I & E) window, the naira traded at a tight swing on Friday. It opened at N411.4/$ and closed at 411.44. Its high and low were N 412.25/$ and N400/$, indicating relatively low volatility of the exchange rate.

Data from FMQB OTC FX Futures also suggested improved optimism. According to the contract opened on July 30, 2021, the value of naira for August 25, 2020, is estimated at N420.93/$.

Earlier contracts dated July 15, 2020, envisaged the local currency to trade at a higher band – N422.12/$. The July 30 data also envisaged a stronger naira at a longer time view. For instance, it projects an exchange rate of N429.63/$ for a future date of February 23, 2022, whereas the exchange rate estimate 15 days earlier for the same future date was N430.73/$.

The data suggest that there is improved perception about the future value of the naira. OTC FX Futures are non-deliverable forwards contracts with parties that agree to an exchange rate for a predetermined date in the future. They, however, do not have an obligation to deliver the underlying dollar on the maturity settlement date. Upon maturity, both parties are assumed to have transacted at the spot FX market rate.

Created in 2016 by the Central Bank of Nigeria (CBN) in partnership with FMDQ, OTC FX Futures contracts are cash-settled domestic local currency while the differential between the contract rate and the Nigerian Autonomous Foreign Exchange (NAFEX) on the maturity day determines the settlement amount.

Yet, the future rates are an important clue revealing market perception about the expected value of the naira. The rates give an idea of market perception, up to five years.