Naira: no respite in forex market

Nigeria’s central bank intervened to defend the beleaguered naira on Monday by selling dollars below its official band for the second time, a sign the bank could weaken the currency to save its dwindling foreign reserves.

The naira crashed through a psychologically important level of 200 to the dollar last week in a rout triggered by weak oil prices and escalating tension over the postponement of a presidential election Africa’s biggest economy, prompting the central bank to step up intervention.

The bank sold dollars in a special auction on Monday at 198 naira to the U.S. currency, similar levels to Friday’s sale, and once again banned banks from reselling dollars bought at the currency auction to other banks.

“The special FX auctions are not sustainable in the current setting … until and unless oil prices rise significantly, there is little the authorities can do to prevent the naira from weakening,” Angus Downie, head of research at Ecobank.

Both the Monday and Friday trades by the bank were outside a target band of 160-176 to the dollar it set in November when it devalued the currency by 8 percent to save its foreign reserves.

The devaluation failed to ease pressure on the naira in an economy reliant on oil for more than 90 percent of its dollar inflows.

The central bank has reiterated it would not devalue the currency but would stabilise the naira and has burned through $1.1 billion over the past nine days to prop up the currency.

Ibrahim Muazu, central bank spokesman told Reuters on Friday the central bank was not planning to devalue the naira again and would continue its special intervention.

Before Monday’s intervention, data showed foreign reserves at $33.04 billion, down 4 percent from a month ago.

The naira Non-Deliverable Forwards – currency derivatives traded offshore – pointed to the local currency being priced at 268-275 to the greenback in a year’s time.

Despite central bank’s intervention, interbank liquidity has remained thin, undermining Nigeria’s credibility as a smoothly functioning capital market, which could trigger its ejection from a JP Morgan emerging market bond index.

“These restrictions may only be lifted once the foreign exchange demand and supply dynamics reaches a point where the CBN is able to supply the market with sufficient foreign exchange,” said Cobus de Hart of NKC Independent Economists in South Africa, referring to the ban on dollar resales.