Naira gains at NAFEX window as CBN squashes early devaluation thoughts

On January 4, 2020, the exchange rate between the naira and dollar closed at N394.3/$1, the first trading day of 2021 at the Investors and Exporters’ (NAFEX) window where forex is traded officially. This is a sharp reversal and an appreciation from the N410.25 recorded on the last day of trading December 31, 2020.

An injection of forex by the central bank forced prices to lower on Monday reversing the depreciation recorded on the last day of trading. We had also reported last week that the latest round of adjustment at the I&E window is temporary as the rates could fall back below N400/$1.

However, at the black market where forex traded unofficially, the exchange rate remained stable at N470/$1 on Monday, January 4, 2021. The exchange rate at the parallel market closed at N470/$1 on the last day of trading December 31, 2020.  It has been trading at N470/$1 since the 29th of December 2020.

The exchange rate disparity between the parallel market and the official market widened again to N75.7 representing a 16% devaluation differential.

NAFEX

The Naira appreciated against the dollar at the Investors and Exporters (I&E) window on Monday, closing at N394.30/$1 as against N410.25 reported on December 31, 2020.

• This represents a N15.95 difference to start the year on a positive note.
• The opening indicative rate was N409.93 to a dollar on Thursday. This represents a N17.05 drop when compared to the N392.88 that was recorded on Thursday last week.
• The N411.05 to a dollar was the highest rate during intra-day trading before, it still closed at N394.30 to a dollar. It also sold for as low as N387/$1 during intra-day trading.
• Forex turnover: Forex turnover at the Investor and Exporters (I&E) window declined by 90.3% on Monday, January 4, 2021.
• According to the data tracked from FMDQ, forex turnover dropped from $235.75 million on Thursday, December 31, 2020, to $22.75 million on Monday, January 4, 2021.
• The average daily forex sale for last week was about $169.93 million, which represents a huge increase from the $34.5 million that was recorded the previous week.
• The exchange rate is still being affected by low oil prices, dollar scarcity, a backlog of forex demand, and a shaky economy that has been hit by the coronavirus pandemic.

Can the naira sustain below N400?

Last Thursday, December 31, 2020, the central bank allowed the exchange rate to depreciate to N410.25 as a late demand surge forced prices higher. Even though the highest price for the day was N411.05 the market still closed lower at N394.3 blowing any initial belief that a devaluation had occurred last week.

Devaluation supporters who had expected this to be a nudge towards “market reality” will be surprised by the appreciation recorded on Monday suggesting that the central bank will continue with the defense of the local currency in the new year. On the flip side, policy supporters will cite this as the effect of market forces.