Naira pressure to persist as dollar allocation to BDCs decline – Businessday

By Hope Moses-Ashike

Dollar sales to Bureau De Change (BDC) operators by Travelex, a global currency dealer, and some banks declined last week from $15,000 to $8,000 per BDC.

The reduction in the volume of weekly sales to BDCs was aimed at ensuring that more operation within and outside Lagos get allocation.

Consequently, the outlook for foreign exchange this week show continued pressure on the local currency. “we anticipate sustained pressure at the alternative foreign exchange market segments due to reduced supply in that market segment”, analysts at Cowry Asset Management limited said.

Also, analysts at Afrinvest Securities limited expect the liquidity constraints in the market to continue to drive the overall performance of the FX market in the coming week.

Against expectation of FX reforms pronouncements at the end of the MPC meeting on Tuesday, the Committee stayed silent on the current state of the interbank market while reinstating its commitment to continue to allocate FX to critical sectors of the economy.

The naira exchange rate to the dollar remained largely stable closing at N305.25/US$1.00 from the previous week’s close of N305.50/US$1.00 at the inter-bank market.

At the parallel market however, the demand pressure remains noticeable as the naira depreciated N5.00/US$1.00 against the greenback on Monday from N465/US$1.00 on previous Friday to N470.00/US$1.00 at the close of trade.

However, the currency stayed flat at N470.00/US$1.00 for the rest of the week implying a 1.1% weakening on a W-o-W basis. We expect the liquidity constraints in the market to continue to drive the overall performance of the FX market in the coming week.

At the currency derivatives market, the value of opened contracts closed the week lower at US$3.6bn from the previous week’s close of US$3.8bn on the back of NGUS NOV 2016 contract (with open value of US$421.7m) that was settled by the CBN on Wednesday and replaced with NGUS NOV 2017 (open value subscribed at US$89.5m).

On the contract list, the 11-12 month term to maturity currently presents the most attractive hedging opportunities (prices at N260.00/US$1.00 and N262.00/US$1.00) since the contracts are not opened for speculative purposes.

Afrinvest said its analysis is premised on the potential FX depreciation in the horizon when the necessary inevitable reforms of the market become operative.

“The 1-year derived futures price, if we assume 18.0% risk free rate and the current interbank and parallel market spot prices, suggests N365.45/US$1.00 (CBN Spot) and N550.72/US$1.00 (parallel) as against the CBN’s price of N260.00/US$1.00 for 1-year FX futures contract rate. Overall, only 30.1% of the futures contracts have been subscribed from inception to date”, the analysts said.